-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pc2ZuYorpiLT8tSaVG8vqonh3hy8RpNG479w5kFVuSxG60DvCdUKedh0WaNRIeoZ 7GwGEnH9GWQ5HIAiLUiuPA== 0000891618-99-005238.txt : 19991117 0000891618-99-005238.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GERON CORPORATION CENTRAL INDEX KEY: 0000886744 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 752287752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20859 FILM NUMBER: 99755383 BUSINESS ADDRESS: STREET 1: 230 CONSTITUTION DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6504737700 MAIL ADDRESS: STREET 1: 200 CONSTITUTION DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------- FORM 10-Q ---------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ . COMMISSION FILE NUMBER: 0-20859 ---------------- GERON CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 75-2287752 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 230 CONSTITUTION DRIVE, MENLO PARK, CA 94025 (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $0.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Common Stock $0.001 par value Outstanding at November 11, 1999: 16,788,293
================================================================================ 2 GERON CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1: Financial Statements..................................................... 3 Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998........................................................ 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998............................ 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998........................................ 5 Notes to Financial Statements............................................ 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 9 Item 3: Quantitative and Qualitative Disclosures About Market Risk............... 27 PART II. OTHER INFORMATION Item 1: Legal Proceedings........................................................ 27 Item 2: Changes In Securities and Use of Proceeds................................ 27 Item 3: Defaults upon Senior Securities.......................................... 27 Item 4: Submission of Matters to a Vote of Security Holders...................... 27 Item 5: Other Information........................................................ 27 Item 6: Exhibits and Reports on Form 8-K......................................... 28 SIGNATURES ......................................................................... 28
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GERON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents .............. $ 27,794 $ 16,360 Short-term investments ................. 13,904 8,109 Interest and other receivables ......... 599 661 Other current assets ................... 601 685 --------- -------- Total current assets ........... 42,898 25,815 Long-term investments .................... 4,759 15,954 Property and equipment, net .............. 3,948 2,336 Intangibles .............................. 15,993 -- Deposits and other assets ................ 625 351 --------- -------- $ 68,223 $ 44,456 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................... $ 546 $ 1,184 Accrued liabilities .................... 3,521 1,220 Current portion of accrued research funding commitment ................... 1,515 -- Deferred revenue ....................... -- 244 Current portion of capital lease obligations and equipment loans ...... 1,170 906 --------- -------- Total current liabilities ...... 6,752 3,554 Noncurrent portion of capital lease obligations and equipment loans ...... 1,980 1,300 Accrued research funding commitment ...... 14,322 -- Convertible debentures ................... 19,851 6,801 Commitments Redeemable convertible preferred stock ... -- 3,610 Stockholders' equity: Common stock ............................. 15 13 Additional paid-in-capital ............... 121,308 88,055 Notes receivable from stockholders ....... (60) (4) Deferred compensation .................... (986) (1,383) Accumulated deficit ...................... (94,910) (57,520) Accumulated other comprehensive (loss)/income ........................ (119) 30 Cumulative translation adjustment ........ 70 -- --------- -------- Total stockholders' equity ..... 25,318 29,191 --------- -------- $ 68,223 $ 44,456 ========= ========
See accompanying notes. 3 4 GERON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues from collaborative agreements ....... $ 1,250 $ 1,494 $ 3,994 $ 5,212 License fees and royalties ................... 26 34 123 76 ----------- ----------- ----------- ----------- Total revenues .......................... 1,276 1,528 4,117 5,288 Operating expenses: Research and development ................... 7,028 3,839 15,973 11,272 Acquired research technology ............... -- -- 23,403 -- General and administrative ................. 1,210 994 3,572 2,814 ----------- ----------- ----------- ----------- Total operating expenses ................ 8,238 4,833 42,948 14,086 ----------- ----------- ----------- ----------- Loss from operations ......................... (6,962) (3,305) (38,831) (8,798) Interest and other income .................... 782 627 2,435 1,994 Interest and other expense ................... (760) (83) (1,887) (249) ----------- ----------- ----------- ----------- Net loss ..................................... $ (6,940) $ (2,761) $ (38,283) $ (7,053) Accretion of redemption value of redeemable convertible preferred stock ................. -- -- (73) -- ----------- ----------- ----------- ----------- Net loss applicable to common stockholders.... $ (6,940) $ (2,761) $ (38,356) $ (7,053) =========== =========== =========== =========== Basic and diluted net loss per share ......... $ (0.42) $ (0.25) $ (2.55) $ (0.63) =========== =========== =========== =========== Weighted average shares used in computing basic and diluted net loss per share ................................... 16,499,403 11,236,561 15,043,967 11,125,258 =========== =========== =========== ===========
See accompanying notes. 4 5 GERON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CHANGE IN CASH AND CASH EQUIVALENTS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss ................................................ $(38,283) $ (7,053) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................ 1,038 811 Interest from convertible debentures ................. 1,131 -- Issuance of common and preferred stock in exchange for services rendered ...................... 1,392 434 Issuance of common stock in acquisition for purchased research .................................. 24,838 -- Deferred compensation ................................ 398 217 Changes in assets and liabilities: Other current and noncurrent assets .................. 1,066 466 Other current and noncurrent liabilities ............. 562 (577) Translation adjustment ............................... 207 -- -------- -------- Net cash used in operating activities ..................... (7,651) (5,702) Cash flows from investing activities: Capital expenditures .................................... (2,487) (516) Purchases of securities available-for-sale .............. (12,864) (25,119) Proceeds from sales/calls of securities available-for-sale .................................... 2,004 -- Proceeds from maturities of securities available-for-sale .................................... 16,111 14,465 Accrued research funding payments ....................... (1,538) -- -------- -------- Net cash provided by (used in) investing activities ....... 1,226 (11,170) Cash flows from financing activities: Proceeds from equipment loans ........................... 1,907 498 Payments of obligations under capital leases and equipment loans ....................................... (963) (826) Redemption of preferred stock ........................... (3,683) -- Proceeds from issuance of common and preferred stock, net ............................................ 598 19,282 Proceeds from issuance of debentures .................... 20,000 -- -------- -------- Net cash provided by financing activities ................. 17,859 18,954 -------- -------- Net increase in cash and cash equivalents ................. 11,434 2,082 Cash and cash equivalents at the beginning of the period ................................................... 16,360 4,122 -------- -------- Cash and cash equivalents at the end of the period ........ $ 27,794 $ 6,204 ======== ========
See accompanying notes. 5 6 GERON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated unaudited balance sheet as of September 30, 1999 and condensed consolidated statements of operations for the three and nine month periods ended September 30, 1999 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999 or any other period. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 1998, included in the Company's Annual Report on Form 10-K. The consolidated financial statements include the accounts of Geron Corporation, and its wholly owned subsidiary, Geron Bio-Med Ltd., a company organized under the laws of the United Kingdom. All material intercompany accounts, transactions, and expenses have been eliminated in consolidation. The financial statements of the Company's subsidiary outside the United States are measured using the local currency as the functional currency. Assets and liabilities of this subsidiary are translated at the rates of exchange at the balance sheet date. The resultant translation adjustments are included in the cumulative translation adjustment, a separate component of stockholders' equity. Income and expense items are translated at average monthly rates of exchange. Certain reclassifications of prior year amounts have been made to conform to current year presentation. Net Loss Per Share Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding. Because the Company is in a net loss position, diluted earnings per share is also calculated using the weighted average number of common shares outstanding and excludes the effects of options, warrants and convertible securities which are antidilutive. Had the Company been in a net income position, diluted earnings per share would have included the shares used in the computation of basic net loss per share as well as an additional 1,334,937 and 1,359,846 shares for 1999 and 1998, respectively, related to outstanding options and warrants not included above (as determined using the treasury stock method at the estimated average market value). 2. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in interest-bearing money market funds, municipal notes and commercial paper. As of September 30, 1999, the Company's investments consisted primarily of corporate notes with maturities ranging from three to 16 months. 3. CONVERTIBLE DEBENTURES SERIES A AND B DEBENTURES AND WARRANTS On December 10, 1998, the Company entered into an agreement to sell $15.0 million in convertible zero coupon debentures and warrants to purchase 1,250,000 shares of Common Stock to investment funds managed by three institutional investors. The debentures are convertible at any time by the holders at a fixed conversion price of 6 7 $10.00 per share. One-half of the proceeds were funded upon signing the agreement, at which time $7.5 million of series A convertible debentures and warrants to purchase 625,000 shares of Common Stock were issued. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for five consecutive trading days. The warrants are exercisable at $12.00 per share at any time through June 2000. The proceeds of $7.5 million from the issuance of the series A convertible debentures and warrants were allocated between the series A convertible debentures and the warrants as follows: $6.8 million to the debentures and $719,000 to the warrants. The series A convertible debentures, which were recorded at a discount, are being accreted to the redemption amount over the three year term using the interest method. During the third quarter of 1999, an aggregate principal amount of $500,000 of series A convertible debentures were issued into 50,000 shares of Geron Common Stock at $10.00 per share. As of September 30, 1999, $2.5 million of series A convertible debentures and warrants to purchase 625,000 shares of Common Stock remained outstanding. In June 1999, $7.5 million of series B convertible debentures and warrants to purchase 625,000 shares of Common Stock were sold under the agreement entered into in December 1998. The price and terms of the series B convertible debentures were identical to the series A convertible debentures. In connection with the issuance of the series B convertible debentures and warrants, the Company recorded approximately $562,500 in interest expense for the difference between the fair value of the Common Stock on the date of signing and the conversion price of the debentures. The warrants are exercisable at $12.00 per share at any time through November 2000. The $7.5 million proceeds from the series B convertible debentures and warrants were allocated between the series B convertible debentures and the warrants as follows: $6.8 million to the debentures and $719,000 to the warrants. The series B convertible debentures, which were recorded at a discount, are being accreted to the redemption amount over the three year term using the interest method. During the third quarter of 1999, an aggregate principal amount of $2.0 million of series B convertible debentures were converted into 200,000 shares of Geron Common Stock at $10.00 per share. As of September 30, 1999, $5.5 million of series B convertible debentures and warrants to purchase 625,000 shares of Common Stock remained outstanding. SERIES C DEBENTURES AND WARRANTS On September 30, 1999, the Company sold $12.5 million in series C convertible two-percent coupon debentures and warrants to purchase 1,100,000 shares of Common Stock to an institutional investor. The debentures are convertible at any time by the holder at a fixed conversion price of $10.25 per share. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for ten consecutive trading days. The warrants to purchase 1,000,000 shares of Common Stock are exercisable at $12.50 per share and the warrants to purchase 100,000 shares of Common Stock are exercisable at $12.75 per share. The warrants are exercisable for Common Stock at the option of the holder until the earlier of (i) 540 days after our authorized Common Stock is duly increased by at least 1,710,381 shares or (ii) September 21, 2001. As of the date of issuance of the series C convertible debentures, the Company did not have sufficient authorized common shares to permit the holder to fully convert the series C debentures and exercise the warrants. The Company has agreed to request stockholder approval by March 31, 2000 of an increase in its authorized common shares to allow for the full conversion of the series C debentures and exercise of the series C warrants. In the event the Company does not obtain stockholder approval prior to March 31, 2000, the Company will be in default under the debenture and will be obligated to redeem the debentures at the request of the series C convertible debenture holders at the greater of 115% of the principal amount of the debentures or an amount equal to the fair value of the common stock such debentures would have converted into plus expenses. As of September 30, 1999, the redemption amount would be $14,375,000. The debentures will be accreted to the redemption amount over the period from September 30, 1999 to March 31, 2000 using the interest method. However, if the Company obtains stockholder approval prior to March 31, 2000 of a sufficient increase in its authorized common shares to allow for the full conversion of the debentures and exercise of the warrants, no additional amounts will be accreted after the date at which the approval is obtained. 7 8 On the date of issuance of the debentures, the Company recorded approximately $305,000 in interest expense for the difference between the fair value of the Company's Common Stock on September 30, 1999 and the conversion price of the debentures. The value of the warrants was determined to be $1,265,000. The Company will not record the value of the warrants until the authorization of additional shares is obtained. At that time, consistent with the provisions of EITF 98-5, which is effective for transactions occurring after May 20, 1999, the Company will record the value of the warrants as a credit to additional paid-in-capital and the offsetting debit will be recorded to interest expense. 4. SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in its fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The Company's chief decision maker, as defined under SFAS 131, is the Chief Executive Officer. To date, the Company has viewed its operations as principally one segment, the discovery and development of therapeutic and diagnostic products for the treatment of cancer and other age-related degenerative diseases. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company's principal operating segment. 5. UNAUDITED PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated statement of operations data for the nine months ended September 30, 1999 set forth below gives effect to the acquisition of Roslin Bio-Med Ltd. as if it occurred on January 1, 1999. The unaudited pro forma consolidated statement of operations data for the nine months ended September 30, 1998 set forth below gives effect to the acquisition of Roslin Bio-Med Ltd. as if it occurred on January 1, 1998.
NINE MONTHS ENDED NINE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ Revenues ........................................... $ 4,117 $ 5,288 Net loss ........................................... $(41,869) $(34,359) Basic and diluted net loss per share ............... $ (2.62) $ (2.63)
6. CONSOLIDATED STATEMENT OF CASH FLOW DATA
NINE MONTHS ENDED NINE MONTHS ENDED (IN THOUSANDS) SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ Supplementary investing and financing activities Common stock issued under purchase plan ............ $ 105 $ 75 Notes receivable from stockholders ................. $ (59) $ -- Valuation of warrants issued with convertible debentures ...................................... $ 719 $ -- Accretion of premium on convertible preferred stock ........................................... $ 73 $ -- Accrued research funding commitment ................ $17,187 $ -- Conversion of convertible debentures, net .......... $ 6,555 $ -- Net unrealized gain (loss) on available-for-sale securities ................... $ (149) $(43)
8 9 GERON CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipate", "believe", "plan", "expect", "future", "intend" and similar expressions to identify forward-looking statements. These statements appear throughout the Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily with respect to our operations and related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, in the section of this Item 2 titled "Additional Factors That May Affect Future Results," and elsewhere in this Form 10-Q. The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Geron Corporation (the "Company" or "Geron") is a biopharmaceutical company focusing on discovering, developing and commercializing therapeutic and diagnostic products to treat cancer and other age-related chronic degenerative diseases. Geron's technology platform includes the discovery of small molecule inhibitors of telomerase for cancer therapy; telomere and telomerase-based research and diagnostic tools; telomerase activation to extend the replicative lifespan of normal cells; and complementary stem cell, gene therapy and nuclear transfer approaches to restore the function of degenerating organs. On September 30, 1999, the Company sold $12.5 million in series C convertible two-percent coupon debentures and warrants to purchase 1,100,000 shares of Common Stock to an institutional investor. The debentures are convertible at any time by the holder at a fixed conversion price of $10.25 per share. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for ten consecutive trading days. The warrants to purchase 1,000,000 shares of Common Stock are exercisable at $12.50 per share and the warrants to purchase 100,000 shares of Common Stock are exercisable at $12.75 per share. The warrants are exercisable for Common Stock at the option of the holder until the earlier of (i) 540 days after our authorized Common Stock is duly increased by at least 1,710,381 shares or (ii) September 21, 2001. As of the date of issuance of the series C convertible debentures and warrants, the Company did not have sufficient authorized common shares to allow for the series C debenture holder to fully convert the series C debentures and exercise the warrants. The Company has agreed to request stockholder approval by March 31, 2000 of an increase in its authorized common shares to allow for the full conversion of the series C debentures and exercise of the series C warrants. The Company's results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the timing and composition of funding under various collaborative agreements, as well as the progress of its research and development efforts. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. Geron is subject to risks common to companies in its industry and at its stage of development, including risks inherent in its research and development efforts, reliance upon collaborative partners, enforcement of patent and proprietary rights, need for future capital, potential competition and uncertainty of regulatory approvals or clearances. In order for a product to be commercialized based on the Company's research, it will be necessary for Geron and its collaborators to conduct preclinical tests and clinical trials, demonstrate efficacy and safety of the Company's product candidates, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. The Company does not expect to receive revenues or royalties based on therapeutic products for a period of years. See "Additional Factors That May Affect Future Results." 9 10 RESULTS OF OPERATIONS REVENUES Contract revenues were $1.3 million and $4.0 million for the three and nine months ended September 30, 1999, respectively, compared to $1.5 million and $5.2 million for the comparable periods in 1998. Contract revenues in 1999 were from research support payments under the Company's collaborative agreement with Pharmacia & Upjohn (the "Pharmacia & Upjohn Agreement"). Contract revenues in 1998 were from research support payments under the Pharmacia & Upjohn Agreement and the Kyowa Hakko Agreement. Research support payments of $1.25 million per quarter are required to be made under the Pharmacia & Upjohn Agreement until January 2000. Research support payments under the Kyowa Hakko Agreement expired in April 1998 in accordance with the terms of the Kyowa Hakko Agreement. The Company recognizes revenue as related research and development costs are incurred under the collaborative agreements. The Company receives license payments and royalties from license and marketing agreements with various diagnostic collaborators. Royalties of $26,000 and $83,000, for the three and nine months ended September 30, 1999, respectively, were received from licensees, including Kyowa Medex Co., Ltd, Intergen and PharMingen (a Becton Dickinson company) on the sale of diagnostic kits to the research-use-only market, compared to $34,000 and $76,000 for the comparable periods in 1998. License fees of none and $50,000 were received for the three and nine months ended September 30, 1999. No license fees were received for the comparable periods in 1998. RESEARCH AND DEVELOPMENT EXPENSES AND ACQUIRED RESEARCH EXPENSES Research and development expenses were $7.0 million and $16.0 million for the three and nine months ended September 30, 1999, respectively, compared to $3.8 million and $11.3 million for the comparable periods in 1998. The increase in research and development expenses in the 1999 periods from the comparable 1998 periods reflected an increase in scientific headcount associated with the continued development of the Company's research programs. The Company expects research and development expense to increase in the future as a result of increasing development of its research programs toward products. Acquired research expenses were the result of the acquisition of Roslin Bio-Med. The acquisition was accounted using the purchase method of accounting. The purchase price was allocated among the acquired basic research in the form of a license in the nuclear transfer technology, the research agreement with the Roslin Institute and the net tangible assets of Roslin Bio-Med. The value of the nuclear transfer technology of $23.4 million has been reflected as acquired research expense and the value of the research agreement of $17.2 million has been capitalized as an intangible asset which is being amortized using the interest method over six years. The total purchase price of $44.4 million also included acquisition costs of $2.9 million. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $1.2 million and $3.6 million for the three and nine months ended September 30, 1999, respectively, compared to $994,000 and $2.8 million for the comparable periods in 1998. The increase in general and administrative expenses in 1999 from 1998 was due to the addition of administrative personnel in Scotland as a result of the acquisition of Roslin Bio-Med. The Company expects that general and administrative expenses will increase in the future as it continues to integrate its new overseas operations. INTEREST AND OTHER INCOME Interest income was $506,000 and $1.6 million for the three and nine months ended September 30, 1999, respectively, compared to $532,000 and $1.4 million for the comparable periods in 1998. The overall increase in interest income is due to higher cash balances in 1999 than 1998 as a result of the Company acquiring approximately $4.0 million of cash from Roslin Bio-Med and the sale of debentures in December 1998, June 1999 and September 1999. Interest earned in the future will depend on the Company's funding cycles and prevailing interest rates. The Company also received $276,000 and $846,000 in research payments under government grants for the three and nine months ended September 30, 1999, respectively, compared to $95,000 and $572,000 for the comparable periods in 1998. The Company does not expect income from government grants to be significant in the foreseeable future. 10 11 INTEREST AND OTHER EXPENSE Interest and other expense was $760,000 and $1.9 million for the three and nine months ended September 30, 1999, respectively, compared to $83,000 and $249,000 for the comparable periods in 1998. In connection with the issuance of the series C convertible debentures, the Company recorded approximately $305,000 in interest expense in September 1999 for the difference between the fair value of the Common Stock on the date of signing and the conversion price of the debentures. In addition, the Company is accreting the value of the warrants issued with series A and B debentures to the redemption value of the debentures using the interest method. The value of the series C warrants was determined to be $1,265,000. The Company will not record the value of the warrants until the authorization of additional shares is obtained. At that time, consistent with the provisions of EITF 98-5, which is effective for transactions occurring after May 20, 1999, the Company will record the value of the warrant as a credit to additional paid-in-capital and the offsetting debit will be recorded to interest expense. In addition, the Company will accrete the series C debentures to the redemption amount from September 30, 1999 to March 31, 2000 using the interest method. The Company expects interest and other expense to increase in the future as a result of debenture financings. NET LOSS Net loss was $6.9 million and $38.3 million for the three and nine months ended September 30, 1999, respectively, compared to $2.8 million and $7.1 million for the comparable periods in 1998. The increase for the three months ended September 30, 1999 was primarily due to the additional research funding to the Roslin Institute as well as the operations of Geron's new subsidiary in Scotland. The increase for the nine months ended September 30, 1999, was mainly the result of the acquired research from Roslin Bio-Med of approximately $23.4 million. Excluding the effect of the expense of the Roslin Bio-Med purchase, the Company continues to expect net loss to increase from the current levels as it continues to develop its internal and external programs. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investments at September 30, 1999 were $46.5 million compared to $40.4 million at December 31, 1998. The increase in cash, cash equivalents and investments in the nine months ended September 30, 1999 was the net result of sale of the series B and C convertible debentures and warrants, the redemption of the remaining shares of the series A Preferred Stock and the costs incurred for the acquisition of Roslin Bio-Med. It is the Company's investment policy to invest these funds in liquid, investment-grade securities, such as interest-bearing money market funds, commercial paper and federal agency notes. Net cash used in operations increased to $7.7 million for the nine months ended September 30, 1999 compared to $5.7 million for the comparable period in 1998. The increase resulted primarily from a higher net loss recognized in 1999 as a result of the acquisition of Roslin Bio-Med. For the nine months ended September 30, 1999, additions of equipment and leasehold improvements totaled approximately $2.5 million, most of which were financed through equipment financing arrangements. Minimum annual payments due under the equipment financing facility are expected to total $1.2 million, $1.2 million, $848,000, $720,000 and $132,000 in 1999, 2000, 2001, 2002 and 2003, respectively. As of September 30, 1999, the Company had approximately $796,000 available for borrowing under its equipment financing facility. The drawdown period under the equipment financing facility expires on August 31, 2000. The Company maintains agreements with academic and research institutions to fund certain scientific research. Minimum annual payments due under these agreements, other than the Roslin Institute, are expected to total approximately $1.6 million and $405,000 in 1999 and 2000, respectively. As of September 30, 1999, the Company has made payments of approximately $1.3 million to academic and research institutions, excluding the Roslin Institute. In May 1999, the Company formed a research collaboration with the Roslin Institute and has committed approximately $20.5 million in research funding over the next six years to be paid in installments of approximately $580,000 per quarter. As of September 30, 1999, the Company has paid approximately $1.5 million to the Roslin Institute. 11 12 On September 30, 1999, the Company sold $12.5 million in series C convertible two-percent coupon debentures and warrants to purchase 1,100,000 shares of Common Stock to an institutional investor. The debentures are convertible at any time by the holder at a fixed conversion price of $10.25 per share. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for ten consecutive trading days. The warrants to purchase 1,000,000 shares of Common Stock are exercisable at $12.50 per share and the warrants to purchase 100,000 shares of Common Stock are exercisable at $12.75 per share. The warrants are exercisable for Common Stock at the option of the holder until the earlier of (i) 540 days after our authorized Common Stock is duly increased by at least 1,710,381 shares or (ii) September 21, 2001. As of the date of issuance of the series C convertible debentures and warrants, the Company did not have sufficient authorized common shares to permit the holder to fully convert the series C debentures and exercise the warrants. The Company has agreed to request stockholder approval by March 31, 2000 of an increase in its authorized common shares to allow for the full conversion of the series C debentures and exercise of the series C warrants. In the event the Company does not obtain stockholder approval prior to March 31, 2000, the Company will be in default under the debentures and will be obligated to redeem the debentures at the request of the series C convertible debenture holders at the greater of 115% of the principal amount of the debentures or an amount equal to the fair value of the common stock such debentures would have converted into plus expenses. As of September 30, 1999, the redemption amount would be $14,375,000. The debentures will be accreted to the redemption amount over the period from September 30, 1999 to March 31, 2000 using the interest method. However, if the Company obtains stockholder approval prior to March 31, 2000 of a sufficient increase in its authorized common shares to allow for the full conversion of the debentures and exercise of the warrants, no additional amounts will be accreted after the date at which the approval is obtained. The Company has funded its operations primarily through public and private debt and equity financings. The Company has also received additional funding from collaborative agreements, grant revenues, interest income and equipment financing. The Company will seek additional funding through other strategic collaborations, public or private equity financings, or other financing sources. The Company estimates that its existing capital resources, payments under the Pharmacia & Upjohn collaborative agreement, interest income and equipment financing will be sufficient to fund its current level of operations to the end of the second quarter of 2001. There can be no assurance, however, that changes in the Company's research and development plans or other changes affecting the Company's operating expenses will not result in the expenditure of available resources before such time, and in any event, the Company will need to raise substantial additional capital to fund its operations in future periods. The Company intends to seek additional funding through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources that may be available. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or laboratory equipment that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations, including, among other things, a temporary inability to process transactions, send checks, perform research and development activities or engage in similar normal business activities. 12 13 Based on its assessment, the Company determined that it was required to modify or replace certain portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. These software programs included the Company's accounting package and voicemail system. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. The Company has completed formal communications with all of its significant suppliers, service providers and corporate partners to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company's total Year 2000 project cost and estimated time to complete included the estimated costs and time associated with the impact of third party Year 2000 issues and was based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be upgraded or converted and will not have an adverse effect on the Company's systems. Such suppliers, service providers and corporate partners include the Company's payroll service provider, local financial institutions and website maintenance organization. The Company utilized both internal and external resources to replace and test software for Year 2000 modifications. All of the Company's Year 2000 (Y2K) scheduled work is complete. The Y2K project phases included: (1) inventorying and prioritizing business critical systems; (2) Y2K compliance analysis; (3) remediation activities including repairing or replacing identified systems; (4) testing; and (5) developing contingency plans. The Company believes that with the completed modifications, the Y2K issue will not pose significant operational problems for its computer systems and equipment. However, even with such modifications and conversions, the Year 2000 issue could have a material impact on the operations of the Company, the precise degree of which cannot be known at this time. The total cost of the Year 2000 project was estimated at $200,000 and was funded through current cash holdings. Of the total project cost, approximately $100,000 was attributable to the purchase of new software and equipment, which was capitalized. The remaining $100,000, which was expensed as incurred, did not have a material effect on the Company's results of operations. To date, the Company has incurred approximately $200,000 ($100,000 capitalized for new systems and $100,000 expensed), related to the assessment of, and efforts on, its year 2000 project. The costs of the project was based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that additional costs may be incurred after the Year 2000. Although the Company does not believe that it will incur any material costs or experience material disruptions in its business associated with preparing its internal systems for the year 2000, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are composed of third party software and third party hardware that contains embedded software. The most reasonably likely worst case scenarios would include: (i) corruption of data contained in the Company's internal information systems, (ii) hardware failure, and (iii) the failure of infrastructure services provided by government agencies and other third parties (e.g., electricity, phone service, water, transport, Internet services, etc.). The Company is in the process of implementing action plans for the remediation of high risk areas and is scheduled to implement remediation plans for medium to low risk areas during the remainder of fiscal 1999. The Company expects its contingency plans to include, among other things, manual "work-arounds" for software and hardware failures, finding alternate vendors for supplies and equipment as well as substitution of systems, if necessary. 13 14 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Before you invest in our common stock, you should be aware that there are various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this Form 10-Q, before you decide whether to purchase shares of our common stock. OUR PRODUCT DEVELOPMENT PROGRAMS ARE AT AN EARLY STAGE AND MAY NOT RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS; FAILURE TO DEVELOP ANY COMMERCIALLY VIABLE PRODUCTS MAY IMPAIR OUR ABILITY TO ATTRACT FUTURE FUNDING AND OUR ABILITY TO SUSTAIN OPERATIONS The study of the mechanisms of cellular aging and cellular immortality, including telomere biology and telomerase, the study of human pluripotent stem cells, and the process of nuclear transfer are relatively new areas of research. While our development efforts are at different stages for different products, we cannot assure you that we will successfully develop any products or that we will not abandon some or all of our proposed research programs. In the long term, for any of our cancer treatments or other discoveries to be proven commercially viable, we will need to demonstrate to the health care community that the treatment or products are: - safe; - effective; - reliable; and - not subject to other problems that would affect commercial viability. If and when potential lead drug compounds or product candidates are identified through our research programs, they will require significant preclinical and clinical testing prior to regulatory approval in the United States and elsewhere. In addition, we will also need to determine whether any of these potential products can be manufactured in commercial quantities at an acceptable cost. Our efforts may not result in a product that can be marketed. Because of the significant scientific, regulatory and commercial milestones that must be reached for any of our research programs to be successful, any program may be abandoned, even after significant resources have been expended. Our inability to identify an effective compound for inhibiting telomerase may prevent us from developing a viable cancer treatment product, which would adversely impact our future business prospects As a result of our drug discovery efforts to date, we have identified compounds in laboratory studies that demonstrate potential for inhibiting telomerase in humans. However, additional development efforts will be required before we select a lead compound for preclinical development and clinical trials as a telomerase inhibitor for cancer. We will have to conduct additional research before we can select a compound and we may never identify a compound that will enable us to fully develop a commercially viable treatment for cancer. If and when selected, a lead compound may prove to have undesirable and unintended side effects or other characteristics affecting its safety or effectiveness that may prevent or limit its commercial use. In terms of safety, our discoveries may result in cancer treatment solutions that cause unacceptable side effects for the human body. Our discoveries may also not be as effective as is necessary to market a commercially viable product for the treatment of cancer. For example, we expect that telomerase inhibition may have delayed effectiveness as telomeres resume normal shortening. As a result, telomerase inhibition may need to be used in conjunction with other cancer therapies. Accordingly, it may become extremely difficult for us to proceed with preclinical and clinical development, to obtain regulatory approval or to market a telomerase inhibitor for the treatment of cancer. If we abandon our research for cancer treatment for any of these reasons or for other reasons, our business prospects would be materially and adversely affected. Our research related to the treatment of age-related degenerative diseases has not yet identified a compound that has potential as a therapeutic agent and failure to do so would lead to the termination of this program The research resulting from our telomerase activation and expression program has shown us that the activation of telomerase can extend cell lifespan in normal human cells. While telomere length and replicative capacity have been extended in laboratory studies, we may not discover a compound that will modulate telomere length or increase replicative capacity effectively for clinical use. We have yet to identify any lead compounds that have been 14 15 demonstrated to modulate gene expression in human cells and we cannot guarantee that we will be able to discover or develop the necessary compound. There is currently insufficient clinical data to determine the full utility of our cancer diagnostic tests and negative data could cause cancellation of the program There is, as yet, insufficient clinical data to confirm the full utility of our proprietary telomerase detection technology to diagnose, prognose, monitor patient status and screen for cancer. Although Intergen, Roche Diagnostics, Kyowa Medex and PharMingen, our licensees, have begun to sell kits for research use, additional development work and regulatory consents will be necessary prior to the introduction of tests for clinical use. Our research on human pluripotent stem cells is at an early stage and may not result in any commercially viable products Our pluripotent stem cell therapies program is also at an early stage. While human pluripotent stem cells have been derived and allowed to expand and differentiate into numerous cell types, our efforts to direct differentiation of human pluripotent stem cells and develop products from our research may not result in any commercial applications. Our research related to nuclear transfer may not result in any commercially viable products Nuclear transfer techniques are still in the process of being fully understood. Our research collaboration with the Roslin Institute focuses at its most fundamental level on understanding the molecular mechanisms used by egg cell cytoplasm to reprogram adult cells. Our goal is to confer reprogramming capability to the cytoplasm of any mature cell in order to produce transplantable tissue-matched cells for an intended transplant recipient. However, our research in this area is in its early stages and may not result in any commercially viable products for human health or agriculture. WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS We have incurred net operating losses every year since our operations began in 1990. As of September 30, 1999, our accumulated deficit was approximately $94.9 million. Losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We expect to incur additional operating losses over the next several years as our research and development efforts and preclinical testing activities are expanded. Substantially all of our revenues to date have been research support payments under the collaborative agreements with Kyowa Hakko and Pharmacia & Upjohn. Research support payments under the agreement with Kyowa Hakko expired in April 1998. Research payments under the agreement with Pharmacia & Upjohn expire in January 2000. We are unable to estimate at this time the level of revenue to be received from the sale of diagnostic products, and do not expect to receive significant revenues from the sale of research-use-only kits. Our ability to achieve profitability is dependent on our ability, alone or with others, to: - continue to have success with our research and development efforts; - select therapeutic compounds for development; - obtain the required regulatory approvals; and - manufacture and market resulting products. We cannot assure you when or if we will receive material revenues from product sales or achieve profitability. Failure to generate significant additional revenues and achieve profitability could impair our ability to sustain operations. WE DEPEND ON OUR COLLABORATIVE PARTNERS TO HELP US COMPLETE THE PROCESS OF DEVELOPING AND TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS MAY BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE UNSUCCESSFUL Our strategy for the development, clinical testing and commercialization of our products requires entering into collaborations with corporate partners, licensors, licensees and others. We are dependent upon the subsequent 15 16 success of these other parties in performing their respective responsibilities and the continued cooperation of our partners. We cannot assure you that our partners will cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators' resources that will be devoted to our research activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us. Our ability to successfully develop and commercialize telomerase inhibition products depends on our corporate partnerships with Kyowa Hakko and Pharmacia & Upjohn, and our ability to successfully develop and commercialize telomerase diagnostic products depends on our corporate partnership with Roche Diagnostics. Under our collaborative agreements with these partners, we rely significantly on them, among other activities, to: - design and conduct advanced clinical trials; - fund research and development activities with us; - pay us fees upon the achievement of milestones; and - co-promote with us any commercial products that result from our collaborations. The development and commercialization of products from these collaborations will be delayed if Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics fail to conduct these collaborative activities in a timely manner or at all. In addition, Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics could terminate these agreements and we cannot assure you that we will receive any development or milestone payments. If we do not receive research funds or achieve milestones set forth in the agreements, or if Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics or any of our future partners breach or terminate collaborative agreements with us, our business may be damaged significantly. We are also, to a lesser extent, dependent upon collaborative partners other than Kyowa Hakko, Pharmacia & Upjohn and Roche Diagnostics. For example, we have entered into licensing arrangements with several diagnostic companies for our telomerase detection technology. However, because these licenses are limited to the research-use-only market, these arrangements are not expected to generate significant commercial revenues, if at all. UNEXPECTED COSTS AND OTHER DIFFICULTIES ARISING FROM OUR ACQUISITION OF ROSLIN BIO-MED LTD. AND SIMULTANEOUS RESEARCH COLLABORATION WITH THE ROSLIN INSTITUTE MAY DRAIN HUMAN AND FINANCIAL RESOURCES, OR OTHERWISE NEGATIVELY AFFECT OUR OPERATIONS In May 1999, we acquired Roslin Bio-Med, a private company located in Scotland which was established by the Roslin Institute to develop nuclear transfer technology. Our acquisition of Roslin Bio-Med and formation of a research collaboration with the Roslin Institute have expanded the scope of our business and operations. As a result, we may be presented with operational issues that we have not previously faced as a company, but which generally accompany acquisitions and research collaborations of this nature, including: - the difficulty of assimilating Roslin Bio-Med's operations and personnel; - the potential disruption of ongoing business and distraction of management; - unanticipated expenses related to technology and research integration; - the difficulty of implementing and maintaining uniform standards, controls, procedures and policies; - the potential impairment of relationships with employees and collaborators as a result of integration of new management personnel; and - the potential unknown liabilities associated with acquired businesses. We cannot assure you that we will be able to overcome any of these obstacles, and our failure to do so could prevent us from achieving the perceived benefits of the acquisition and collaboration and negatively impact our research activities and results of operations. In addition, our agreement with the Roslin Institute obligates us to provide approximately $21 million in development funding. If we are unable to fulfill this significant obligation, the Roslin Institute could terminate the agreement and we would lose our rights to the technology. 16 17 THE ACQUISITION OF ROSLIN BIO-MED HAS SUBJECTED US TO THE UNCERTAINTY INHERENT IN INTERNATIONAL OPERATIONS, AND WE HAVE LIMITED EXPERIENCE WITH INTERNATIONAL OPERATIONS To date, we have only limited experience in managing operations internationally. Our acquisition of Roslin Bio-Med represents our first experience in managing international operations. As a result of our international expansion, we are now subject to the uncertainties inherent in international operations, including: - unexpected changes in regulatory requirements; - compliance with international laws; - difficulties in staffing and managing international operations including those that arise as a result of distance, language and cultural differences; - currency exchange rate fluctuations; - political instability; - export restrictions; and - potentially adverse tax consequences. One or more of these factors could have a material adverse effect on our future international operations, the success of our acquisition of Roslin Bio-Med and, consequently, on our business, operating results, and financial condition. Similarly, our collaborations with international partners such as the Roslin Institute, Pharmacia & Upjohn, Kyowa Hakko and Roche Diagnostics could also subject us to the above described international uncertainties. IF WE ARE UNABLE TO ENTER INTO COLLABORATIVE RELATIONSHIPS FOR MANUFACTURING, MARKETING AND SALES, WE WILL NEED TO DEVELOP THESE CAPABILITIES ON OUR OWN WHICH WOULD BE COSTLY AND WOULD SLOW OUR PRODUCT DEVELOPMENT EFFORTS We currently have no manufacturing infrastructure and no marketing or sales organization. As a result, we intend to rely almost entirely on our current and future collaborative partners for manufacturing and principal marketing and sales responsibilities for any potential products. To the extent that we choose not to or are unable to establish these arrangements, we will require substantially greater capital to develop our own manufacturing, marketing and sales capabilities. We cannot assure you that we will be able to negotiate additional strategic arrangements in the future on acceptable terms, if at all, or that any potential strategic arrangement will be successful. In the absence of these arrangements, we may encounter significant delays in introducing any product or find that the research, development, manufacture, marketing or sale of any product is adversely affected. In the event we need to enter into strategic arrangements in the future, but are unable to do so, our business will be significantly and negatively impacted. OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS We rely extensively and have relationships with scientific advisors at academic and other institutions, some of whom conduct research at our request. These scientific advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of these advisors and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities. If our scientific advisors are unable or refuse to contribute to the development of any of our potential discoveries, our ability to generate significant advances in our technologies will be significantly harmed. In addition, we have formed research collaborations with many academic and other research institutions throughout the world, including the Roslin Institute. These research facilities may have commitments to other commercial and non-commercial entities. We have limited control over the operations of these laboratories and can expect only limited amounts of time to be dedicated to our research goals. 17 18 IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH ARE COSTLY AND DIFFICULT TO PROTECT, MAY LIMIT OUR ABILITY TO PURSUE THE DEVELOPMENT OF OUR INTENDED TECHNOLOGIES AND PRODUCTS Our success will depend on our ability to obtain and enforce patents for our discoveries; however, legal principles for biotechnology patents are not firmly established and the extent to which we will be able to obtain patent coverage is uncertain Protection of our proprietary compounds and technology is critically important to our business. Our success will depend in part on our ability to obtain and enforce our patents and maintain trade secrets, both in the United States and in other countries. The patent positions of pharmaceutical and biopharmaceutical companies, including ours, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly established. We cannot assure you that we will continue to develop products or processes that are patentable or that patents will issue from any of our pending applications, including allowed patent applications. Further, we cannot assure you that our current patents, or patents that issue on pending applications, will not be challenged, invalidated or circumvented, or that our current or future patent rights will provide proprietary protection or competitive advantages to us. In the event that we are unsuccessful in obtaining and enforcing patents, our business would be negatively impacted. Patent applications in the United States are maintained in secrecy until patents issue. Publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by at least several months and sometimes several years. Therefore, we cannot assure you that the persons or entities that we or our licensors name as inventors in our patents and patent applications were the first to invent the inventions disclosed in the patent applications or patents, or file patent applications for these inventions. As a result, we may not be able to obtain patents from discoveries that we otherwise would consider patentable and that we consider to be extremely significant to our future success. Patent prosecution or litigation may also be necessary to obtain patents, enforce any patents issued or licensed to us or to determine the scope and validity of our proprietary rights or the proprietary rights of another. We cannot assure you that we would be successful in any patent prosecution or litigation. Patent prosecution and litigation in general can be extremely expensive and time consuming, even if the outcome is favorable to us. An adverse outcome in a patent prosecution, litigation or any other proceeding in a court or patent office could subject our business to significant liabilities to other parties, require disputed rights to be licensed from other parties or require us to cease using the disputed technology. We may be subject to infringement claims that are costly to defend, and which may limit our ability to use disputed technologies and prevent us from pursuing research and development or commercialization of potential products Our commercial success depends significantly on our ability to operate without infringing patents and proprietary rights of others. We cannot assure you that our technologies do not and will not infringe the patents or proprietary rights of others. In the event our technologies do infringe on the rights of others, we may be prevented from pursuing research, development or commercialization of potential products or may be required to obtain licenses to these patents or other proprietary rights or develop or obtain alternative technologies. We may not be able to obtain alternative technologies or any required license on commercially favorable terms, if at all. If we do not obtain the necessary licenses or alternative technologies, we may be delayed or prevented from pursuing the development of some potential products. Our breach of an existing license or failure to obtain alternative technologies or a license to any technology that we may require to develop or commercialize our products will significantly and negatively affect our business. Patent law relating to the scope and enforceability of claims in the technology fields in which we operate is still evolving, and the degree of future protection for any of our proprietary rights is highly uncertain. In this regard we cannot assure you that independent patents will issue from any of our patent applications, some of which include many interrelated applications directed to common or related subject matter. As a result, our success may become dependent on our ability to obtain licenses for using the patented discoveries of others. We are aware of patent applications and patents that have been filed by others with respect to telomerase and telomere length technology and we may have to obtain licenses to use this technology. For example, there are a number of issued patents and pending applications owned by others directed to differential display, stem cell and other technologies relating to our 18 19 research, development and commercialization efforts. We may also become aware of discoveries and technology controlled by third parties that are advantageous to our other research programs. We cannot assure you that our discoveries and treatments can be further developed and commercialized without a license to these discoveries or technologies. Moreover, other patent applications may be granted priority over patent applications that we or any of our licensors have filed. Furthermore, others may independently develop similar or alternative technologies, duplicate any of our technologies or design around the patented technologies we have developed. In the event that we are unable to acquire licenses to critical technologies that we cannot patent ourselves, we may be required to expend significant time and resources to develop similar technology, and we may not be successful in this regard. If we cannot acquire or develop the necessary technology, we may be prevented from pursuing some of our business objectives. Moreover, one of our competitors could acquire or license the necessary technology. Any of these events could have a material adverse effect on our business. We cannot assure you that we will not be subject to claims or litigation as a result of entering into license agreements with third parties or infringing on the patents of others. For example, we signed a licensing and sponsored research agreement relating to our pluripotent stem cell therapies program with The Johns Hopkins University School of Medicine in August 1997. Prior to signing this agreement, we had been informed by a third party that we and Johns Hopkins University would violate the rights of that third party and another academic institution in doing so. After a review of the correspondence with the third party and Johns Hopkins University, as well as related documents, including an issued U.S. patent, we believe that both we and Johns Hopkins University have substantial defenses to any claims that might be asserted by the third party. We have agreed to provide indemnification to Johns Hopkins University relating to potential claims. However, any litigation resulting from this matter may divert significant resources, both financial and otherwise, from our research programs. We cannot assure you that we would be successful if the matter is litigated. If the outcome of litigation is unfavorable to us, our business could be materially and adversely affected. Much of the information and know-how that is critical to our business is not patentable and we may not be able to prevent others from obtaining this information and establishing competitive enterprises We rely extensively on trade secrets to protect our proprietary technology, especially in circumstances in which patent protection is not believed to be appropriate or obtainable. We attempt to protect our proprietary technology in part by confidentiality agreements with our employees, consultants and contractors. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors, any of which would harm our business significantly. WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN We will require substantial capital resources in order to conduct our operations and develop our products. We estimate that our existing capital resources, payments under the Pharmacia & Upjohn collaborative agreement, interest income and equipment financing will be sufficient to fund our current level of operations through the second quarter of 2001. The timing and degree of any future capital requirements will depend on many factors, including: - the accuracy of the assumptions underlying our estimates for our capital needs in 1999 and beyond; - continued scientific progress in our research and development programs; - the magnitude and scope of our research and development programs; - our ability to maintain and establish strategic arrangements for research, development, clinical testing, manufacturing and marketing; - our progress with preclinical and clinical trials; - the time and costs involved in obtaining regulatory approvals; - the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and - the potential for new technologies and products. 19 20 We intend to acquire additional funding through strategic collaborations, public or private equity financings and capital lease transactions. Additional financing may not be available on acceptable terms, or at all. Additional equity financings could result in significant dilution to stockholders. Further, in the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs, each of which could have a material adverse effect on our business. SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN OPERATIONS The pharmaceutical and biopharmaceutical industries are intensely competitive. We believe that other pharmaceutical and biopharmaceutical companies and research organizations currently engage in or have in the past engaged in efforts related to the biological mechanisms of cell aging and cell immortality, including the study of telomeres, telomerase, human pluripotent stem cells, and nuclear transfer. In addition, other products and therapies that could compete directly with the products that we are seeking to develop and market currently exist or are being developed by pharmaceutical and biopharmaceutical companies, and by academic and other research organizations. Many companies are also developing alternative therapies to treat cancer and, in this regard, are competitors of ours. The pharmaceutical companies developing and marketing these competing products have significantly greater financial resources and expertise than we do in: - research and development; - manufacturing; - preclinical and clinical testing; - obtaining regulatory approvals; and - marketing. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for research, clinical development and marketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring technologies complementary to our programs. There is also competition for access to libraries of compounds to use for screening. Should we fail to secure and maintain access to sufficiently broad libraries of compounds for screening potential targets, our business would be materially harmed. In addition to the above factors, we expect to face competition in the following areas: - product efficacy and safety; - the timing and scope of regulatory consents; - availability of resources; - reimbursement coverage; - price; and - patent position, including potentially dominant patent positions of others. As a result of the foregoing, our competitors may develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than us. Most significantly, competitive products may render our products that we develop obsolete. THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP PRODUCTS Our future success depends to a significant extent on the skills, experience and efforts of our executive officers and key members of our scientific staff. The loss of any or all of these individuals could damage our business and might significantly delay or prevent the achievement of research, development or business objectives. We also rely on consultants and advisors, including the members of our Scientific Advisory Board, who assist us in formulating our research and development strategy. We face intense competition for qualified individuals from 20 21 numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. We may not be able to attract and retain these individuals on acceptable terms. Failure to do so would adversely affect our business. THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF THE PLURIPOTENT STEM CELL THERAPIES AND NUCLEAR TRANSFER PROGRAMS COULD PREVENT US FROM DEVELOPING OR GAINING ACCEPTANCE FOR COMMERCIALLY VIABLE PRODUCTS IN THIS AREA Our pluripotent stem cell therapies program may involve the use of human pluripotent stem cells that would be derived from human embryonic or fetal tissue. The use of human pluripotent stem cells gives rise to ethical, legal and social issues regarding the appropriate use of these cells. In the event that our research related to human pluripotent stem cell therapies becomes the subject of adverse commentary or publicity, our name and goodwill could be adversely affected. In addition, our nuclear transfer program involves the same techniques that have previously been utilized to clone sheep. It is possible that these nuclear transfer techniques could also be used in attempts to reproductively clone living human beings, an application that we believe to be unnecessary and unethical. Although we and the Roslin Institute support the current international prohibitions on human reproductive cloning, the process of nuclear transfer itself still gives rise to ethical, legal and social issues regarding the appropriate nature of this type of research. In the event that our research related to nuclear transfer becomes the subject of adverse commentary or publicity, our name and goodwill could be adversely affected. We have established an Ethics Advisory Board comprised of independent and recognized medical ethicists to advise us with respect to these issues. Indeed, the use of human pluripotent stem cell and nuclear transfer techniques in scientific research is an issue of national interest. Many research institutions, including several of our scientific collaborators, have adopted policies regarding the ethical use of these types of human cells. These policies may have the effect of limiting the scope of research conducted in this area. The United States government currently does not fund research that involves the use of human pluripotent cells or tissue and may in the future regulate or otherwise restrict its use. The pluripotent stem cell therapies program would be significantly harmed if we are prevented from conducting research on these cells due to government regulation or otherwise. Also, in the event that regulatory bodies ban nuclear transfer processes, our nuclear transfer program could be cancelled and our business could be negatively affected. OUR ABILITY TO EARN REVENUES FROM THE SALE OF MARKETABLE PRODUCTS IS PARTLY DEPENDENT ON THE SCOPE OF GOVERNMENT REGULATION AND OUR SUCCESS IN OBTAINING REGULATORY APPROVAL FOR OUR PRODUCTS Our business is subject to intense government regulation and this regulation may significantly impact our ability to create and market commercially viable products Federal, state and local governments in the United States and governments in other countries have significant regulations in place that govern many of our activities. The preclinical testing and clinical trials of the products that we develop ourselves or that our collaborative partners develop are subject to intense government regulation and may prevent us from creating commercially viable products from our discoveries. In addition, the sale by us or our collaborative partners of any commercially viable product will be subject to government regulation from several standpoints, including the processes of: - manufacturing; - labeling; - selling; - distributing; - marketing; - advertising; and - promoting. We cannot assure you that we will be able to comply with these regulations for any of our potentially marketable products. To the extent that we are unable, our ability to earn revenues will be significantly and negatively impacted. 21 22 The regulatory process, particularly for biopharmaceutical products like ours, is uncertain, can take many years and requires the expenditure of substantial resources. Any product that we or our collaborative partners develop must receive all relevant regulatory agency approvals or clearances, if any, before it may be marketed in the United States or other countries. Generally, biological drugs and non-biological drugs are regulated more rigorously than medical devices. In particular, human pharmaceutical therapeutic products, including a telomerase inhibitor, are subject to rigorous preclinical and clinical testing and other requirements by the Food and Drug Administration in the United States and similar health authorities in foreign countries. The regulatory process, which includes extensive preclinical testing and clinical trials of each product in order to establish its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities is susceptible to varying interpretations that could delay, limit or prevent regulatory agency approvals or clearances. In addition, delays or rejections may be encountered based upon changes in regulatory agency policy during the period of product development and/or the period of review of any application for regulatory agency approval or clearance for a product. Delays in obtaining regulatory agency approvals or clearances could: - significantly harm the marketing of any products that we or our collaborative partners develop; - impose costly procedures upon our activities or the activities of our collaborative partners; - diminish any competitive advantages that we or our collaborative partners may attain; or - adversely affect our ability to receive royalties and generate revenues and profits. Even if we commit the time and resources, both economic and otherwise, that are necessary, the required regulatory agency approvals or clearances may not be obtained for any products developed by or in collaboration with us. If regulatory agency approval or clearance for a new product is obtained, this approval or clearance may entail limitations on the indicated uses for which it may be marketed that could limit the potential market for the product. Furthermore, approved products and their manufacturers are subject to continual review, and discovery of previously unknown problems with a product or its manufacturer may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. Failure to comply with regulatory requirements can result in severe civil and criminal penalties, including but not limited to: - recall or seizure of products; - injunction against manufacture, distribution, sales and marketing; and - criminal prosecution. The imposition of any of these penalties could significantly impair our business. TO BE SUCCESSFUL, OUR PRODUCTS MUST BE ACCEPTED BY THE HEALTH CARE COMMUNITY THAT CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES AND PRODUCTS We cannot assure you that any products successfully developed by us or by our collaborative partners, if approved for marketing, will achieve market acceptance since physicians, patients or the medical community in general may decide not to accept and utilize these products. The products that we are attempting to develop may represent substantial departures from established treatment methods and will compete with a number of traditional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of our developed products will depend on a number of factors, including: - our establishment and demonstration to the medical community of the clinical efficacy and safety of our product candidates; - our ability to create products that are superior to alternatives currently on the market; - our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and - reimbursement policies of government and third-party payors. If the health care community does not accept our products for any of the foregoing reasons, our ability to generate revenues will be significantly impaired. 22 23 THE REIMBURSEMENT STATUS OF NEWLY-APPROVED HEALTH CARE PRODUCTS IS UNCERTAIN AND FAILURE TO OBTAIN REIMBURSEMENT APPROVAL COULD SEVERELY LIMIT THE USE OF OUR PRODUCTS Significant uncertainty exists as to the reimbursement status of newly approved health care products, including pharmaceuticals. If we fail to generate adequate third party reimbursement for the users of our potential products and treatments, then we may be unable to maintain price levels sufficient to realize an appropriate return on our investment in product development. In both domestic and foreign markets, sales of our products, if any, will depend in part on the availability of reimbursement from third-party payors, examples of which include: - government health administration authorities; - private health insurers; - health maintenance organizations; and - pharmacy benefit management companies. Both federal and state governments in the United States and foreign governments continue to propose and pass legislation designed to contain or reduce the cost of health care through various means. Legislation and regulations affecting the pricing of pharmaceuticals and other medical products may change or be adopted before any of our potential products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we may develop in the future. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services and any of our potential products and treatments may ultimately not be considered cost effective by these third parties. Any of these initiatives or developments could negatively impact our business. OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE MATERIALS BY OUR EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT FINANCIAL PENALTIES Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. As a consequence, we are subject to numerous environmental and safety laws and regulations. We may be required to incur significant costs to comply with current or future environmental laws and regulations and may be adversely affected by the cost of compliance with these laws and regulations. Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of an accident of this nature, our use of these materials could be curtailed by state or federal authorities and we could be held liable for any resulting damages. Should either of these contingencies arise, our business could be materially and adversely affected. WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS Although we believe that we do not currently have any exposure to product liability claims, our future business will expose us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic and diagnostic products. We currently have no clinical trial liability insurance and we may not be able to obtain and maintain this type of insurance for any of our clinical trials. In addition, we may not be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities. THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND MAY RESULT IN SIGNIFICANT DILUTION TO OUR CURRENT STOCKHOLDERS Sales of a substantial number of shares of our common stock in the public market could significantly and negatively affect the market price for our common stock. As of October 25, 1999, we had outstanding approximately 16,788,293 shares of common stock. As of October 25, 1999, we also had reserved 4,946,196 shares of common stock for issuance upon exercise of outstanding warrants and options that we issued to our employees and other entities. 23 24 In addition, the conversion of outstanding debentures and the exercise of outstanding warrants would result in our issuance of a minimum of 4,369,512 additional shares of common stock in the aggregate. This number of shares could prove to be significantly greater, and you would be increasingly diluted, in the event that the conversion or exercise prices are reduced because we: - have a rights offering, or a similar offering of securities to all investors, at less than the conversion or exercise price per share respectively; or - issue common stock or securities convertible into common stock, other than under our stock plans or in connection with a strategic joint venture, at a price less than the conversion price per share. Current holders of our common stock will also be immediately and substantially diluted to the extent that the weighted average conversion and exercise price of any of the above-described convertible and exercisable securities is less than the price of our common stock on the date holders of these securities convert or exercise their convertible or exercisable securities. In connection with the acquisition of Roslin Bio-Med, we issued 2,100,000 shares of our common stock. We are contractually required to register these shares for resale within 120 days following May 3, 1999. We have filed a registration statement covering these shares. Of these shares 315,000 shares are held in escrow. Subject to claims against the shares held in escrow, these shares will be released from escrow to the former Roslin Bio-Med shareholders in May 2000. Pursuant to a professional services agreement, we have also agreed to issue and register for resale an additional 75,000 shares of our common stock. Further, in connection with a registration rights agreement with the holders of series C debentures and warrants, we have agreed to register for resale an aggregate of 2,899,390 shares of our common stock issuable upon conversion of series C debentures and exercise of series C warrants, subject to adjustment under certain circumstances. We anticipate this registration will occur in the first quarter of 2000. The registration of all the shares described above will cause them to be saleable in the public markets at the time of and following registration, and could cause downward pressure on the market price of our common stock. Additionally, one of our current strategic partners and stockholders, Pharmacia & Upjohn, has contractually agreed not to sell the 696,787 shares of common stock that it holds until April 2000, at which time these shares will be eligible for sale and freely transferable in the public market. COMPLIANCE WITH CERTAIN PROVISIONS OF OUR OUTSTANDING DEBENTURES ARE SUBJECT TO OBTAINING APPROVAL OF OUR STOCKHOLDERS, WHICH IS OUTSIDE OUR CONTROL; FAILURE TO OBTAIN SUCH APPROVALS COULD REQUIRE US TO REDEEM THE DEBENTURES Currently, we do not have a sufficient number of authorized shares of common stock to fulfill our reserve requirements under our series C debentures and warrants. An increase in authorized capital would require the approval of our stockholders to amend our certificate of incorporation. Our failure to do so prior to March 31, 2000 would be an event of default under our series C debentures and would require us to redeem the remaining unconverted debentures at a 15% premium to their principal balance at such time. As of September 30, 1999, the redemption amount would be $14,375,000. We are accreting the debenture value to the redemption amount over the period from September 30, 1999 to March 31, 2000 using the interest method. However, if we obtain stockholder approval prior to March 31, 2000 to permit the full conversion of the debentures and exercise of the warrants, no additional amounts will be accreted after the date at which the approval is obtained. In addition, under the rules of the Nasdaq Stock Market, we may not issue shares upon conversion of the series A, B and C debentures in an aggregate amount greater than 19.99 percent of the number of shares outstanding prior to the issuance of the debentures without the prior approval of our stockholders. If, as a result of an adjustment in the conversion price of any of the debentures, we would be required to issue shares of our common stock in excess of such limitation and have not obtained stockholder approval to do so, we would be required to redeem the remaining debentures at a 15% premium to their principal balance at such time. As of the date of this 10-Q, approximately $20.5 million aggregate principal amount of debentures is outstanding, including $12.5 million of series C debentures. Redemption of a significant amount of debentures could deplete our cash reserves significantly. 24 25 OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE Stock prices and trading volumes for many biopharmaceutical companies fluctuate widely for a number of reasons, including some reasons which may be unrelated to their businesses or results of operations. This market volatility, as well as general domestic or international economic, market and political conditions, could materially and adversely affect the market price of our common stock and your return on your investment. Historically, our stock price has been extremely volatile. Between January 1998 and September 1999, our stock price traded as high as $24.50 per share and as low as $3.50 per share. The significant market price fluctuations of our common stock are due to a variety of factors, including: - depth of the market for the common stock; - the experimental nature of our prospective products; - fluctuations in our operating results; - market conditions relating to the biopharmaceutical and pharmaceutical industries; - any announcements of technological innovations, new commercial products or clinical progress or lack thereof by us, our collaborative partners or our competitors; or - announcements concerning regulatory developments, developments with respect to proprietary rights and our collaborations. In addition, the stock market is subject to other factors outside our control that can cause extreme price and volume fluctuations. Securities class action litigation has often been brought against companies, including many biotechnology companies, which then experience volatility in the market price of their securities. Litigation brought against us could result in substantial costs and a diversion of management's attention and resources, which could adversely affect our business. OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND THE VOTING RIGHTS OF THE HOLDERS OF COMMON STOCK Our certificate of incorporation provides our Board of Directors with the authority to issue up to 3,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of these shares without further vote or action by the stockholders. In March 1998, we designated and issued 15,000 shares as series A preferred stock, all of which have since been converted into common stock or redeemed. As of the date of this Form 10-Q, the Board of Directors still has authority to designate and issue up to 2,985,000 shares of preferred stock. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock may be adversely affected. The issuance of preferred stock may also result in the loss of voting control by others. PROVISIONS IN OUR CHARTER AND BYLAWS, AND PROVISIONS OF DELAWARE LAW, MAY INHIBIT POTENTIAL ACQUISITION BIDS FOR US, WHICH MAY PREVENT HOLDERS OF OUR COMMON STOCK FROM BENEFITING FROM WHAT THEY BELIEVE MAY BE THE POSITIVE ASPECTS OF ACQUISITIONS AND TAKEOVERS In addition to the undesignated preferred stock, provisions of our charter documents and bylaws may make it substantially more difficult for a third party to acquire control of us and may prevent changes in our management, including provisions that: - prevent stockholders from taking actions by written consent; - divide the board of directors into separate classes with terms of office that are structured to prevent all of the directors from being elected in any one year; and - set forth procedures for nominating directors and submitting proposals for consideration at stockholders' meetings. Provisions of Delaware law may also inhibit potential acquisition bids for us or prevent us from engaging in business combinations. 25 26 Either collectively or individually, these provisions may prevent holders of our common stock from benefiting from what they may believe are the positive aspects of acquisitions and takeovers, including the potential realization of a higher rate of return on their investment from these types of transactions. YEAR 2000 PROBLEMS COULD AFFECT OUR DAY-TO-DAY OPERATIONS AND CAUSE SIGNIFICANT ECONOMIC LIABILITIES Potential year 2000 problems are the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or laboratory equipment that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations, including, among other things, a temporary inability to: - process transactions; - send checks; - perform research and development activities; or - engage in similar normal business activities. Based our assessment, we were required to modify or replace portions of our software so that our computer systems will function properly with respect to dates in the year 2000 and beyond. These software programs included our accounting package and voicemail system. We presently believe that with modifications to existing software and conversions to new software, potential year 2000 problems will not pose significant operational problems for our computer systems. However, even with these modifications and conversions, potential year 2000 problems could have a significant and negative impact on our operations. We have completed formal communications with all of our significant suppliers, service providers and corporate partners to determine the extent to which our interface systems and other operations are vulnerable to those third parties' failure to remediate their own year 2000 issues. Our total year 2000 project cost and estimated time to complete included the estimated costs and time associated with the impact of third party year 2000 issues and was based on presently available information. However, we cannot assure you that the systems of other companies on which our systems rely will be upgraded or converted and will not have an adverse effect on our systems. Such suppliers, service providers and corporate partners include our payroll service provider, local financial institutions and website maintenance organization. The total cost of our year 2000 project was estimated at $200,000 and was funded through current cash holdings. Of the total project cost, approximately $100,000 was attributable to the purchase of new software and equipment, which was capitalized. The remaining $100,000, which was expensed as incurred, did not have a material effect on our results of operations. To date, we have incurred approximately $200,000 ($100,000 capitalized for new systems and $100,000 expensed), related to the assessment of, and efforts on, our year 2000 project. Although we do not believe that we will incur any material costs or experience material disruptions in our business associated with preparing our internal systems for the year 2000, we cannot assure you that we will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in our internal systems, which are composed of third party software and third party hardware that contains embedded software. The most reasonably likely worst case scenarios could include: (i) corruption of data contained in our internal information systems, (ii) hardware failure, and (iii) the failure of infrastructure services provided by government agencies and other third parties, such as electricity, phone service, water, transport and Internet services. 26 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about Geron's market risk disclosures contains forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The fair value of Geron's investments in marketable securities at September 30, 1999 was $43.1 million. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. We diversify the marketable securities portfolio by investing in multiple types of investment grade securities. We primarily invest our marketable securities portfolio in short-term securities with at least an investment grade rating to minimize interest rate and credit risk as well as to provide for an immediate source of funds. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold. Foreign Currency Exchange Risk. We participate in transactions primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. All transactions are currently made in U.S. dollars. However, more frequents transactions in the future may be in British pound sterling. A weakening of the dollar or strengthening of the pound sterling could make our transactions more costly. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the third quarter of 1999, an aggregate principal amount of $500,000 series A convertible debentures converted into 50,000 shares of Common Stock at $10.00 per share. An aggregate principal amount of $2.0 million of series B convertible debentures converted into 200,000 shares of Common Stock at $10.00 per share. These issuances were exempt from registration under the Securities Act of 1933 pursuant to Section 3(a)(9) thereof as an exchange with existing security holders. On September 30, 1999, the Company sold $12.5 million in convertible two-percent coupon convertible debentures and warrants to purchase 1,100,000 shares of Common Stock to an institutional investor. The debentures are convertible at any time by the holder at a fixed conversion price of $10.25 per share. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for ten consecutive trading days. The warrants to purchase 1,000,000 shares of Common Stock are exercisable at $12.50 per share and the warrants to purchase 100,000 shares of Common Stock are exercisable at $12.75 per share. These warrants are exercisable for Common Stock at the option of the holder until the earlier of (i) 540 days after our authorized Common Stock is duly increased by at least 1,710,381 shares or (ii) September 21, 2001. The debentures and warrants were issued pursuant to an exemption under the Securities Exchange Act of 1933 pursuant to Rule 506 thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 27 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1* License Agreement with Wisconsin Alumni Research Foundation 10.2* Option Agreement with Wisconsin Alumni Research Foundation 10.3* Amendment to the License Agreement with Wisconsin Alumni Research Foundation 27.1 Financial Data Schedule * Certain portions of this exhibit have been omitted for which confidential treatment has been requested and filed separately with the Securities and Exchange Commission. (b) REPORTS ON FORM 8-K (i) The Company filed a report on Form 8-K dated September 30, 1999 reporting the sale of convertible debentures and warrants. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GERON CORPORATION By: /s/ DAVID L. GREENWOOD -------------------------------- David L. Greenwood Senior Vice President and Chief Financial Officer (Duly Authorized Signatory) Date: November 15, 1999 28 29 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1* License Agreement with Wisconsin Alumni Research Foundation 10.2* Option Agreement with Wisconsin Alumni Research Foundation 10.3* Amendment to the License Agreement with Wisconsin Alumni Research Foundation 27.1 Financial Data Schedule
* Certain portions of this exhibit have been omitted for which confidential treatment has been requested and filed separately with the Securities and Exchange Commission. EX-10.1 2 LICENSE AGREEMENT WITH WISCONSIN ALUMNI RESEARCH 1 ***TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83 AND 240.24b-2 Agreement No. 99-0027 LICENSE AGREEMENT This Agreement is made effective the 23rd day of April, 1999, by and between Wisconsin Alumni Research Foundation (hereinafter called "WARF"), a nonstock, nonprofit Wisconsin corporation, and Geron Corporation (hereinafter called "Geron"), a corporation organized and existing under the laws of Delaware; WHEREAS, WARF owns certain inventions that are described in the "Licensed Patents" defined below; WHEREAS, WARF and Geron had previously entered into a license agreement, Agreement No. 95-0208 dated January 1, 1996, as amended on March 19, 1997 and March 1, 1998, (the "Previous License"); WHEREAS, WARF and Geron desire to enter into this Agreement to clarify and refine the agreement between the parties; and WHEREAS, WARF and Geron agree that this Agreement shall supersede the Previous License in its entirety. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the parties covenant and agree as follows: Section 1. Definitions. For the purpose of this Agreement, the Appendix A definitions shall apply. Section 2. Grant. A. License. (i) WARF hereby grants to Geron an exclusive license, limited to the Licensed Field and the Licensed Territory, under the Licensed Patents to make, have made, develop, have developed, use, sell, offer for sale, and import Products. (ii) WARF hereby grants to Geron an exclusive license, limited to the Licensed Field and the Licensed Territory, under the Licensed Patents to make, have made, develop, have developed, use, sell, offer for sale, and import Research Products. (iii) WARF hereby grants to Geron a nonexclusive license, limited to the Licensed Territory, to use the Licensed Patents for internal research purposes. In the event that Geron identifies a research collaborator that Geron desires to obtain Materials for research purposes, Geron shall submit a written request to WARF asking that WARF arrange to transfer Materials to such research collaborator. WARF shall then enter into negotiations directly with such research collaborator using its standard Materials Transfer Agreement for the Materials and shall arrange for transfer of the Materials thereunder. 2 B. Sublicenses. (i) Geron may grant written sublicenses to third parties under the exclusive licenses granted herein. Any agreement granting a sublicense shall state that the sublicense is subject to the termination of this Agreement. Geron shall require that its sublicensee(s) comply with all requirements of this Agreement and Geron shall have the same responsibility for the activities of any sublicensee as if the activities were directly those of Geron. (ii) In respect to sublicenses granted by Geron under this Section 2B, Geron shall pay to WARF an amount equal to what Geron would have been required to pay to WARF had Geron sold the amount of Products sold by such sublicensee. In addition, if Geron receives any fees, minimum royalties, or other payments in consideration for any rights granted under a sublicense, except for payments received by Geron upon achievement of the milestones set forth in Section 4E (provided that Geron makes payment to WARF upon achievement of such milestones pursuant to Section 4E), and such payments are not based directly upon the amount or value of Products sold by the sublicensee, then Geron shall pay WARF [...***...] percent ([...***...]%) of such payments in the manner specified in Section 4F. WARF recognizes that dollars received from sublicensees to fund research are not consideration for rights granted under the sublicense and as such research funds are not subject to sharing with WARF hereunder. However, Geron shall not receive from sublicensees anything of value in lieu of cash payments in consideration for any sublicense under this Agreement without the express prior written permission of WARF. Both parties agree to act in good faith when negotiating the consideration to be paid for sublicensing and when assessing whether such consideration is subject to sharing with WARF under this Section 2B(ii). C. First Option to Negotiate. WARF hereby grants Geron the first option to negotiate an exclusive license for addition of cell types to the Licensed Field. Geron may exercise its option under this Section 2C by providing WARF with written notice of its desire to add a cell type to the License Field including a Development Plan detailing Geron's plan and timeline for bringing Products to market incorporating the new cell type and by paying WARF an upfront license fee to be negotiated in good faith between the parties factoring in commercially reasonable terms given the advancement of cell therapy in therapeutics and diagnostics and the value added by Geron. The terms of the exclusive license, other than the upfront license fee, shall be identical to the terms set forth in this Agreement, unless otherwise negotiated and agreed to by the parties. If the parties fail to agree on an upfront license fee for an additional cell type, WARF agrees that it will not offer such cell type to any third party on terms more favorable as a whole to such licensee than were offered to Geron hereunder for a period of [...***...] ([...***...]) months from the date Geron first exercised its option to add a cell type to the Licensed Field. In the context of this Agreement, "terms more favorable as a whole" shall mean that the combination of the commercial terms, for example the license fee, royalty rate, milestones, minimum royalties, and other fees required as consideration for the rights granted under the license are not more favorable when taken together than the package offered to Geron. The option to add cell types shall expire on [...***...] unless extended for an additional period by written agreement on terms mutually agreeable to the parties. D. License to WARF. To the extent permitted by applicable law, Geron hereby grants WARF (and to the University of Wisconsin - Madison) a nonexclusive, royalty-free, paid-up research license under any and all inventions hereafter made or acquired by Geron to the extent any such inventions are Improvements. Such license - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 2 of 17 3 shall be nontransferable as long as Geron remains an existing and solvent entity but may be transferable upon bankruptcy or dissolution of Geron other than in the event of the sale of substantially all of Geron's assets pursuant to Section 8. "Improvements" shall mean any modification of an invention described in Licensed Patents which, if unlicensed, would infringe one or more claims of the Licensed Patents. Geron shall provide WARF with a written, enabling disclosure of each such invention (such as a U.S. patent application), unambiguously identifying it as an invention governed by this paragraph, within six (6) months of filing a patent application thereon. Section 3. Development Plans and Reporting Geron must provide WARF with a broad development plan (see Appendix E) outlining its general plan and timeline for developing Products in the Licensed Field. In addition, Geron shall provide WARF with a specific development plan, acceptable to WARF, including key milestones dates for submission of IND or comparable filing to the United States Food and Drug Administration or its foreign equivalent, date of NDA approval or comparable approval, and the projected date of first commercial sale for Products related to each cell type in the Licensed Field. Geron shall provide the development plan to WARF upon execution of this Agreement. Furthermore, Geron agrees to and warrants that: it has, or will obtain, the expertise necessary to independently evaluate the inventions of the Licensed Patents; it will establish and actively and diligently pursue the development plan to the end that the inventions of the Licensed Patents will be utilized to provide Products for sale. Within one month following the end of each calendar quarter ending on March 31, June 30, September 30 and December 31 and until commercial sales of Products begin, Geron will supply WARF with a written Development Report showing Geron's progress toward bringing Products to market in the Licensed Field. All development activities and strategies and all aspects of Product design and decisions to market and the like are entirely at the discretion of Geron, and Geron shall rely entirely on its own expertise with respect thereto. WARF's review of Geron's development plan and Development Reports shall be considered confidential information subject to the obligations set forth in Section 19 hereto and shall be solely to verify the existence of Geron's commitment to development activity and to assure compliance with Geron's obligations to utilize the inventions of the Licensed Patents to make Products available for sale in the marketplace, as set forth above. WARF may within thirty (30) days of its request, review all documentation and records relating to Geron's development of the cell lines. Geron shall make such records available at a single United States location. Such review may be performed by any employee of WARF, or any agent designated by WARF. The parties recognize that the development plans are likely to change as Geron's research and development of Products advances; therefore, the parties agree to negotiate in good faith with regard to any revisions to the development plans submitted to WARF. Failure to meet key milestones for development of Products set forth in the development plan shall be subject to review by WARF and may result in termination of the license under Section 7D for any cell types Geron cannot demonstrate diligence and commitment to developing. Section 4. Consideration. A. License Fee. Geron agrees to pay to WARF a license fee comprised of $[...***...] cash; 100,000 options, granted pursuant to Geron's 1994 Stock Option Plan, a copy of which is attached hereto as Appendix F; provided that such options shall have an exercise period of ten years and that the strike price of said options shall be equal to the closing price of Geron stock as of the day prior to the effective date of this Agreement; and 20,000 shares of common stock within thirty (30) days after executing this Agreement as consideration for the exclusive rights granted in the Licensed Field hereunder. In the event that WARF is determined to be ineligible to participate in Geron's 1994 Stock Option Plan by a governmental agency or - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 3 of 17 4 body, Geron agrees to replace such options with Shares of Geron's common stock having the equivalent value of the options issued to WARF within thirty (30) days of such determination. The value of the options shall be as of the date of issuance to WARF hereunder using the Black-Scholes Model for valuation of such options. B. Extension of Patent Term. Geron and WARF hereby agree that they will make all necessary filings and provide all necessary documentation to allow WARF to apply for an extension of the patent term for each of the Licensed Patents pursuant to 37 CFR 1.710 et seq. C. Filing of Foreign Applications. (i) Geron agrees to pay to WARF patent reimbursement to reimburse WARF for a portion of the costs associated with filing, prosecuting and maintaining the Licensed Patents. Geron has paid some patent reimbursement under the terms of the Previous License. However, Geron agrees to pay to WARF patent reimbursement of $[...***...] per United States patent application within thirty (30) days of adding a patent to Licensed Patents hereunder. In addition, Geron shall notify WARF of which countries outside the United States Geron desires foreign patent protection and Geron shall pay to WARF patent reimbursement of $[...***...] per PCT application and $[...***...] per patent application per country outside the United States upon nationalization from the PCT application. WARF reserves the right to file and maintain foreign patent applications in jurisdictions outside those requested by Geron at its own expense; however, for any jurisdiction in which WARF files patent applications without patent reimbursement from Geron, the exclusive license granted to Geron under this Agreement shall be converted into a nonexclusive license subject to all the terms of this Agreement. (ii) WARF will prosecute all applications until WARF determines that continued prosecution is unlikely to result in the issuance of a patent in that country. WARF will timely provide copies of all patent communications with the US Patent Office or its foreign counterpart to Geron and allow Geron the opportunity to comment on the prosecution of the Licensed Patents and patent applications. However, if WARF decides to abandon prosecution of the application in a particular country, Geron shall be given notification that WARF is terminating prosecution in that country. If Geron desires to acquire rights in the application then WARF will cooperate with Geron as reasonably requested by Geron to facilitate acquisition of such rights. D. Royalty. (i) Geron agrees to pay to WARF as "earned royalties" a royalty calculated as a percentage of the Selling Price of Products in accordance with the terms and conditions of this Agreement. The royalty is deemed earned as of the earlier of the date the Product is actually sold and paid for, the date an invoice is sent by Geron, or the date a Product is transferred to a third party for any promotional reasons. The royalty shall remain fixed while this Agreement is in effect at a rate of [...***...] percent ([...***...]%) of the Selling Price for Therapeutic Products and [...***...] percent ([...***...]%) of the Selling Price for Diagnostic Products and Research Products. (ii) If Geron must make payments to one or more third parties during any calendar year to obtain a license or similar right in the absence of which Geron could not legally make, use or sell the Products or Research Products, then Geron may deduct [...***...] percent ([...***...]%) of such third party payments from royalties payable to WARF with respect to that calendar year, provided that such deduction - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 4 of 17 5 does not exceed [...***...] percent ([...***...]%) of the royalties payable to WARF under this Agreement during such calendar year. E. Minimum Royalty and Milestone Payment. (i) Geron agrees to pay to WARF a minimum royalty per calendar year or part thereof during which this Agreement is in effect starting in calendar year 2003, against which any earned royalty paid for the same calendar year will be credited. The minimum royalty shall be $[...***...] in 2003, $[...***...] in 2004, $[...***...] in 2005 and in each calendar year thereafter. The minimum royalty payment for a given year shall be due at the time payments are due for the calendar quarter ending on December 31. It is understood that the minimum royalties will apply on a calendar year basis, and that sales of Products requiring the payment of earned royalties made during a prior or subsequent calendar year shall have no effect on the annual minimum royalty due WARF for any given calendar year. (ii) Geron further agrees to pay to WARF milestone payments as outlined below within thirty (30) days from the specified event set forth below whether achieved by Geron or its sublicensee(s). These payments are not creditable against running royalties or other payments due hereunder.
EVENT CASH OPTIONS SHARES - --------------------------------------------------- -------------- ------------------------------- --------------------- IND or comparable regulatory filing for the first $[...***...] [...***...] options pursuant to [...***...] shares of Product developed from each cell type the 1994 Stock Option Plan Geron Common Stock - --------------------------------------------------- -------------- ------------------------------- --------------------- NDA or comparable regulatory approval for the first $[...***...] [...***...] options pursuant to [...***...] shares of Product developed from each cell type the 1994 Stock Option Plan Geron Common Stock - --------------------------------------------------- -------------- ------------------------------- ---------------------
F. Accounting; Payments. (i) Amounts owing to WARF under Sections 2B and 4D shall be paid on a quarterly basis, with such amounts due and received by WARF on or before the forty-fifth (45th) day following the end of the calendar quarter ending on March 31, June 30, September 30 or December 31 in which such amounts were earned. The balance of any amounts which remain unpaid more than thirty (30) days after they are due to WARF shall accrue interest until paid at the rate of the lesser of [...***...] percent ([...***...]%) per month or the maximum amount allowed under applicable law. However, in no event shall this interest provision be construed as a grant of permission for any payment delays. (ii) Except as otherwise directed, all amounts owing to WARF under this Agreement shall be paid in U.S. dollars to WARF at the address provided in Section 16(a). All royalties owing with respect to Selling Prices stated in currencies other than U.S. dollars shall be converted at the rate shown in the Federal Reserve Noon Valuation - Value of Foreign Currencies on the day preceding the payment. (iii) A full accounting showing how any amounts owing to WARF under Sections 2B and 4D have been calculated shall be submitted to WARF on the date of each such payment. Such accounting shall be on a per-country and product line, model or tradename basis and shall be summarized on the form shown in Appendix C of this Agreement. In the event no payment is owed to WARF, a statement setting forth that fact shall be supplied to WARF. Section 5. Certain Warranties of WARF. - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 5 of 17 6 A. WARF warrants that except as otherwise provided under Section 14 of this Agreement with respect to U.S. Government interests, it is the owner of the Licensed Patents or otherwise has the right to grant the licenses granted to Geron in this Agreement. However, nothing in this Agreement shall be construed as: (i) a warranty or representation by WARF as to the validity or scope of any of Licensed Patents; (ii) a warranty or representation that anything made, used, sold or otherwise disposed of under the license granted in this Agreement will or will not infringe patents of third parties; or (iii) an obligation to furnish any know-how not provided in Licensed Patents or any services other than those specified in this Agreement. B. WARF MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AND ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH RESPECT TO USE, SALE, OR OTHER DISPOSITION BY GERON OR ITS VENDEES OR OTHER TRANSFEREES OF PRODUCTS INCORPORATING OR MADE BY USE OF INVENTIONS LICENSED UNDER THIS AGREEMENT. Section 6. Recordkeeping. A. Beginning when the first of the Products is sold, Geron and its sublicensee(s) shall keep books and records sufficient to verify the accuracy and completeness of Geron's and its sublicensee(s)'s accounting referred to above, including without limitation inventory, purchase and invoice records relating to the Products or their manufacture. Such books and records shall be preserved for a period not less than six years after they are created during and after the term of this Agreement; however, WARF shall have the right to audit the most recent three (3) years of books and records. If a discrepancy of five percent (5%) or more of the royalties paid in any given year is found, WARF shall have the right to audit an additional three (3) years of books and records. B. Geron and its sublicensee(s) shall take all steps necessary so that WARF may within thirty (30) days of its request review and copy all the books and records at a single U.S. location to verify the accuracy of Geron's and its sublicensee(s)'s accounting. Such review may be performed no more than annually by any independent attorney or registered CPA designated by WARF, upon reasonable notice and during regular business hours. C. If a royalty payment deficiency is determined, Geron and its sublicensee(s) shall pay the royalty deficiency outstanding within thirty (30) days of receiving written notice thereof, plus interest on outstanding amounts as described in Section 4F(i). D. If a royalty payment deficiency for a calendar year exceeds five percent (5%) of the royalties paid for that year, then Geron or its sublicensee shall be responsible for paying WARF's out-of-pocket expenses incurred with respect to such review. Page 6 of 17 7 Section 7. Term and Termination. A. The term of this license shall begin on the effective date of this Agreement and continue until the earlier of the date that no Licensed Patent remains an enforceable patent or the payment of earned royalties under Section 4D, once begun, ceases for more than [...***...] ([...***...]) consecutive calendar quarters. B. Geron may terminate this Agreement at any time by giving at least ninety (90) days' written and unambiguous notice of such termination to WARF. Such a notice shall be accompanied by a statement of the reasons for termination. C. If Geron at any time defaults in the timely payment of any monies due to WARF or the timely submission to WARF of any Development Report, fails to actively pursue the development plan, or commits any breach of any other covenant herein contained, and Geron fails to remedy any such breach or default within ninety (90) days after written notice thereof by WARF, WARF may, at its option, terminate this Agreement by giving notice of termination to Geron. D. WARF may terminate this Agreement with respect to any particular cell type for failure by Geron to meet milestones set forth in Geron's development plan with respect to such cell type. In such event, WARF shall provide Geron with notice of termination as a result of such default and Geron shall have ninety (90) days to cure such default or provide WARF with a revision acceptable to WARF of such development plan. E. Upon the termination of this Agreement, Geron shall remain obligated to provide an accounting for and to pay royalties earned up to the date of the termination and any minimum royalties shall be prorated as of the date of termination by the number of days elapsed in the applicable calendar year. Section 8. Assignability. This Agreement may not be transferred or assigned by Geron except to a company in which Geron owns at least fifty percent (50%) of the equity; upon sale or transfer of substantially all the assets of Geron or with the prior written consent of WARF. Section 9. Enforcement. WARF intends to protect the Licensed Patents against infringers or otherwise act to eliminate infringement, when, in WARF's sole judgment, such action may be reasonably necessary, proper, and justified. In the event that Geron believes there is infringement of any Licensed Patent under this Agreement which is to Geron's substantial detriment, Geron shall provide WARF with written notice that such infringement is occurring including reasonable evidence of the infringement. In the event that WARF does take action to abate the infringement, it shall do so at its own expense. Upon request by WARF, Geron shall take action, join in an action, and otherwise provide WARF with such assistance and information as may be useful to WARF in connection with WARF's taking such action (if the cause of action arose during the term of this Agreement and WARF reimburses Geron for Geron's reasonable out-of-pocket expenses upon recovery of damages as described in this Section 9). Geron shall provide WARF with assistance and shall have a right to review and comment on WARF's enforcement of the Licensed Patents in the Licensed Field including the right to review any proposed settlement of an infringement action prior to WARF's entering into such an agreement. Any recovery or damages for - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 7 of 17 8 infringement derived through WARF taking such action shall be applied as follows: (a) first, to WARF to reimburse WARF for the expenses of the litigation, including reasonable attorneys' fees, (b) second, to Geron to reimburse Geron for its reasonable expenses in assisting with such litigation, including reasonable attorneys' fees, and (c) the balance of any recovery or damages, except enhanced damages, shall be divided [...***...] ([...***...]) to Geron and [...***...] ([...***...]) to WARF. If WARF does not take action to abate the infringement of the Licensed Patents within three (3) months of receiving the notice described above, Geron may either reduce the royalty owed on sales of Products under Section 3C in the country where the infringement is occurring by [...***...] percent ([...***...]%) until such infringement is abated or Geron may, with WARF's written consent, bring an action to enforce the Licensed Patents. If Geron receives notice that it is being made a party to a lawsuit and the Licensed Patents are implicated, then WARF shall take action within a reasonable period to allow Geron to defend its interests and the Licensed Patents. If Geron chooses to bring an action against the infringer of the Licensed Patents, it shall do so at its own expense. Any recovery or damages for infringement derived through Geron taking such action shall be applied as follows: (a) first, to Geron to reimburse Geron for the expenses of the litigation, including reasonable attorneys' fees, (b) second, to WARF to reimburse WARF for its reasonable expenses in assisting with such litigation, including reasonable attorneys' fees, and (c) the balance of any recovery or damages shall be divided [...***...] ([...***...]) to WARF and [...***...] ([...***...]) to Geron. Section 10. Contest of Validity. In the event Geron contests the validity of any Licensed Patent, Geron shall continue to pay royalties with respect to that patent as if such contest were not underway until the patent is adjudicated invalid or unenforceable by a court of last resort. Section 11. Patent Marking. Geron shall insure that it and its sublicensee(s) apply patent markings that meet all requirements of U.S. law, 35 U.S.C. 287, with respect to all Products subject to this Agreement. Section 12. Product Liability; Conduct of Business. A. Geron and its sublicensee(s) shall, at all times during the term of this Agreement and thereafter, indemnify, defend and hold WARF and the inventors of the Licensed Patents harmless against all claims and expenses, including legal expenses and reasonable attorneys fees, arising out of the death of or injury to any person or persons or out of any damage to property and against any other claim, proceeding, demand, expense and liability of any kind whatsoever (other than patent infringement claims) resulting from the production, manufacture, sale, use, lease, consumption or advertisement of Products arising from any right or obligation of Geron or any sublicensee hereunder. Notwithstanding the above, WARF at all times reserves the right to retain counsel of its own to defend WARF's interests. B. Geron warrants that it now maintains and will continue to maintain liability insurance coverage appropriate to the risk involved in marketing the products subject to this Agreement and that such insurance coverage lists WARF and the inventors of the Licensed Patents as additional insureds. Within ninety (90) days after the execution of this Agreement and thereafter annually between January 1 and January 31 of each year, Geron will present evidence to WARF that the coverage is being maintained with WARF and its inventors listed as additional insureds. In addition, Geron shall provide WARF with at least 30 days prior written notice of any change in or cancellation of the insurance coverage. - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 8 of 17 9 Section 13. Use of Names. Geron and its sublicensee(s) shall not use WARF's name, the name of any inventor of inventions governed by this Agreement, or the name of the University of Wisconsin in sales promotion, advertising, or any other form of publicity without the prior written approval of the entity or person whose name is being used. Except that Geron may use the following statement: Geron has entered into a sponsored research agreement with the University of Wisconsin -Madison supporting the research of Dr. Thomson in the promising area of primate embryonic stem cells. Geron has executed a license agreement with WARF regarding the technology. Section 14. United States Government Interests. It is understood that if the United States Government (through any of its agencies or otherwise) has funded research, during the course of or under which any of the inventions of the Licensed Patents were conceived or made, the United States Government is entitled, as a right, under the provisions of 35 U.S.C. Section 200-212 and applicable regulations of Chapter 37 of the Code of Federal Regulations, to a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced the invention of such Licensed Patents for governmental purposes. Any license granted to Geron in this Agreement shall be subject to such right. In the event there is assertion by the Government of such rights, Geron may be entitled to modification of the royalty and license fee provisions of the Agreement. Section 15. Miscellaneous. This Agreement shall be construed in accordance with the internal laws of the State of Wisconsin. If any provisions of this Agreement are or shall come into conflict with the laws or regulations of any jurisdiction or any governmental entity having jurisdiction over the parties or this Agreement, those provisions shall be deemed automatically deleted, if such deletion is allowed by relevant law, and the remaining terms and conditions of this Agreement shall remain in full force and effect. If such a deletion is not so allowed or if such a deletion leaves terms thereby made clearly illogical or inappropriate in effect, the parties agree to substitute new terms as similar in effect to the present terms of this Agreement as may be allowed under the applicable laws and regulations. The parties hereto are independent contractors and not joint venturers or partners. Section 16. Notices. Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and shall be deemed to have been given at the earlier of the time when actually received as a consequence of any effective method of delivery, including but not limited to hand delivery, transmission by telecopier, or delivery by a professional courier service or the time when sent by certified or registered mail addressed to the party for whom intended at the address below or at such changed address as the party shall have specified by written notice, provided that any notice of change of address shall be effective only upon actual receipt. (a) Wisconsin Alumni Research Foundation Attn: Managing Director 614 Walnut Street Madison, Wisconsin 53705 (b) Geron Corporation Attn: Vice President of Corporate Development 200 Constitution Drive Page 9 of 17 10 Menlo Park, CA 94025 Section 17. Integration. This Agreement constitutes the full understanding between the parties with reference to the subject matter hereof, and no statements or agreements by or between the parties, whether orally or in writing, except as provided for elsewhere in this Section 17, made prior to or at the signing hereof, shall vary or modify the written terms of this Agreement. Neither party shall claim any amendment, modification, or release from any provisions of this Agreement by mutual agreement, acknowledgement, or otherwise, unless such mutual agreement is in writing, signed by the other party, and specifically states that it is an amendment to this Agreement. Section 18. Contract Formation and Authority. The persons signing on behalf of WARF and Geron hereby warrant and represent that they have authority to execute this Agreement on behalf of the party for whom they have signed. Section 19. Confidentiality. Both parties agree to hold the other party's confidential information in confidence using procedures at least as stringent as the receiving party uses to protect its own confidential information. The confidentiality of information exchanged between the parties shall be governed by the terms of the Confidential Disclosure Agreement No. 99-0051 between the parties dated February 19, 1999. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the dates indicated below. WISCONSIN ALUMNI RESEARCH FOUNDATION By: /s/ Richard H. Leazer Date: 5/6, 1999 ------------------------------------------ Richard H. Leazer, Managing Director GERON CORPORATION By: /s/ David L. Greenwood Date: 5/6, 1999 ------------------------------------------ Name and Office: ------------------------------------------------- - ----------------------------------------------------------------- Reviewed by WARF's General Counsel: /s/ Elizabeth L.R. Donley - --------------------------- Elizabeth L.R. Donley, Esq. April 22, 1999 (WARF's attorney shall not be deemed a signatory to this Agreement.) Page 10 of 17 11 WARF Ref: Thomson-P96014US Page 11 of 17 12 APPENDIX A A. "Licensed Patents" shall refer to and mean those patents and patent applications listed on Appendix B attached hereto that are in countries in the Licensed Territory and any subsequent patent application owned by WARF, including divisionals, continuations, continuations-in-part, reissues, and reexaminations in a country in the Licensed Territory. B. "Products" shall refer to and mean Therapeutic Products and Diagnostic Products. C. "Therapeutic Products" shall refer to and mean products or services other than Diagnostic Products that (i) are used in the treatment of disease in humans, and (ii) employ, are in any way produced by the practice of, are identified using or arise out of any research involving the inventions claimed in the Licensed Patents or that would otherwise constitute infringement of any claims of the Licensed Patents. D. "Diagnostic Products" shall refer to and mean products or services that (i) are used in the diagnosis, prognosis, screening or detection of disease in humans, and (ii) employ, are in any way produced by the practice of, are identified using or arise out of any research involving the inventions claimed in the Licensed Patents or that would otherwise constitute infringement of any claims of the Licensed Patents. E. "Research Products" shall refer to and mean products or services that (i) are used in research as research tools which would infringe the claims of patented technology owned by Geron or which Geron has a right or license to use other than the Licensed Patents, and (ii) which employ, are in any way produced by the practice of, are identified using or arise out of any research involving the inventions claimed in the Licensed Patents or that would otherwise constitute infringement of any claims of the Licensed Patents. Research Products specifically excludes the Materials. F. "Selling Price" shall mean, in the case of Products that are sold, the price to the end user of Products (regardless of uncollectible accounts) less any shipping costs, allowances because of returned Products, value added taxes (or comparable duties as required in each country) or sales taxes. For purposes of this Agreement, the term "price to the end user" shall mean the price paid to Geron for Product by its customer assuming an arm's length transaction. In the event that Geron sells Product to an affiliate, the price shall be deemed that amount that Geron would have received if it had sold Product to an unaffiliated third-party. The "Selling Price" for a Product that is transferred to a third party for promotional purposes without charge or at a discount which exceeds [...***...] percent ([...***...]%) of the annual total of Products sold shall be the average invoice price to the end user of that type of Product during the applicable calendar quarter. All taxes, assessments, or other charges of any kind which may be imposed on sales of Products by any government outside of the United States or any political subdivision of such government with respect to any amounts payable to WARF pursuant to this Agreement shall be paid by Geron. G. "Development Report" shall mean a written account of Geron's progress under the development plan having at least the information specified on Appendix D to this Agreement, and shall be sent to the address specified on Appendix D. H. "Materials" shall refer to and mean the primate, including human, embryonic stem cells claimed in the Licensed Patents. - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 12 of 17 13 I. "Licensed Field" shall be limited to (i) Research Products, (ii) Therapeutic Products and (iii) Diagnostic Products developed from and/or incorporating the Materials as precursors to the following cell types as well as the following cell* types: [...***...] J. "Licensed Territory" shall be worldwide. - -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 13 of 17 14 APPENDIX B LICENSED PATENTS - -------------------------------------------------------------------------------------------------------------------- REFERENCE PATENT ISSUE APPLICATION NUMBER COUNTRY NUMBER DATE SERIAL NUMBER - --------------------------------------------------------------------------------------------------------------------
PRIMATE EMBRYONIC STEM CELLS (THOMSON) - -------------------------------------------------------------------------------------------------------------------- [...***...] UNITED STATES [...***...] - --------------------------------------------------------------------------------------------------------------------
PRIMATE EMBRYONIC STEM CELLS (THOMSON) - -------------------------------------------------------------------------------------------------------------------- P96014US UNITED STATES 5,843,780 12/01/98 - -------------------------------------------------------------------------------------------------------------------- [...***...] PCT [...***...] - -------------------------------------------------------------------------------------------------------------------- [...***...] CANADA [...***...] - -------------------------------------------------------------------------------------------------------------------- [...***...] EPO [...***...] - --------------------------------------------------------------------------------------------------------------------
PRIMATE EMBRYONIC STEM CELLS WITH [...***...] GENES (THOMSON) - -------------------------------------------------------------------------------------------------------------------- [...***...] UNITED STATES [...***...] - --------------------------------------------------------------------------------------------------------------------
- -------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 14 of 17 15 APPENDIX C WARF ROYALTY REPORT AGREEMENT NO: ______________ INVENTOR: ______________ P#: P _________________ PERIOD COVERED: From: / / 199 Through: / / 199 ________________________ _________________________ PREPARED BY: ______________________________ DATE: ________________________ APPROVED BY: ______________________________ DATE: ________________________ If license covers several major product lines, please prepare a separate report for each line. Then combine all product lines into a summary report. REPORT TYPE: [ ] SINGLE PRODUCT LINE REPORT: _______________________________ [ ] MULTIPRODUCT SUMMARY REPORT. Page 1 of ______ Pages [ ] PRODUCT LINE DETAIL. Line: _________ Tradename: __________ Page: _________ REPORT CURRENCY: [ ] U.S. DOLLARS [ ] OTHER ________________________________ - ------------------- ----------------- ---------------- ----------------- ---------------- ---------------------------------- GROSS * LESS: NET ROYALTY PERIOD ROYALTY AMOUNT COUNTRY SALES ALLOWANCES SALES RATE THIS YEAR LAST YEAR - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- U.S.A. - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- Canada - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- Europe: - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- Japan - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- Other: - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- TOTAL: - ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ----------------
Total Royalty: _______ Conversion Rate: ______ Royalty in U.S. Dollars: $_______ The following royalty forecast is non-binding and for WARF's internal planning purposes only: Royalty Forecast Under This Agreement: Next Quarter:____ Q2:____ Q3:____ Q4:____ *On a separate page, please indicate the reasons for returns or other adjustments if significant. Also note any unusual occurrences that affected royalty amounts during this period. To assist WARF's forecasting, please comment on any significant expected trends in sales volume. Page 15 of 17 16 APPENDIX D DEVELOPMENT REPORT A. Date development plan initiated and time period covered by this report. B. Development Report (4-8 paragraphs). 1. Activities completed since last report including the object and parameters of the development, when initiated, when completed and the results. 2. Activities currently under investigation, i.e., ongoing activities including object and parameters of such activities, when initiated, and projected date of completion. C. Future Development Activities (4-8 paragraphs). 1. Activities to be undertaken before next report including, but not limited to, the type and object of any studies conducted and their projected starting and completion dates. 2. Estimated total development time remaining before a product will be commercialized. D. Changes to initial development plan (2-4 paragraphs). 1. Reasons for change. 2. Variables that may cause additional changes. E. Items to be provided if applicable: 1. Information relating to Product that has become publicly available, e.g., published articles, competing products, patents, etc. 2. Development work being performed by third parties other than Geron to include name of third party, reasons for use of third party, planned future uses of third parties including reasons why and type of work. 3. Update of competitive information trends in industry, government compliance (if applicable) and market plan. PLEASE SEND DEVELOPMENT REPORTS TO: Wisconsin Alumni Research Foundation Attn.: Contract Coordinator 614 Walnut Street P.O. Box 7365 Madison, WI 53707-7365 Page 16 of 17 17 APPENDIX E DEVELOPMENT PLAN A development plan of the scope outlined below shall be submitted to WARF by Geron within thirty (30) days of the execution of this Agreement. In general, the plan should provide WARF with a summary overview of the activities that Geron believes are necessary to bring Products to the marketplace. Estimated Start Date Finish Date ---------- ----------- I. Development Program A. Development Activities to be Undertaken (Please break activities into subunits with the date of completion of major milestones) 1. 2. B. Estimated Total Development Time II. Governmental Approval A. Types of submissions required B. Government agency e.g. FDA, EPA, etc. III. Proposed Market Approach IV. Competitive Information A. Potential Competitors B. Potential Competitive Devices/Compositions C. Known Competitor's plans, developments, technical achievements D. Anticipated Date of Product Launch Total Length: approximately 2-3 pages Page 17 of 17 EX-10.2 3 OPTION AGREEMENT WITH WISCONSIN ALUMNI RESEARCH 1 EXHIBIT 10.2 ***TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83 AND 240.24B-2 Agreement No. 99-0036 SPONSOR OPTION AGREEMENT THIS AGREEMENT, dated and effective as of April 23, 1999, is by and between the Wisconsin Alumni Research Foundation ("WARF"), a nonstock, nonprofit Wisconsin corporation, and Geron Corporation ("Sponsor"), a Delaware corporation. PURPOSE OF AGREEMENT WHEREAS, Sponsor, pursuant to a separate agreement with the University of Wisconsin-Madison ("University"), has committed Financial Support (defined below) to the University for the purpose of conducting research; WHEREAS, WARF is willing and hereby offers to grant options to take licenses to additional cell types not covered by the License Agreement (defined below), wherein such option is defined in the License Agreement, and further offers to grant options to any other invention arising from the Financial Support provided to the University by the Sponsor and under certain patents or patent applications which are or will be assigned to WARF, and Sponsor hereby states its desire for such options; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the parties covenant and agree as follows: Section 1. DEFINITIONS. For the purposes of this Agreement, the Appendix 1 definitions shall apply. Section 2. GRANT OF OPTIONS TO LICENSES. A. Future Notification and Option to Future Patents. (i) WARF shall notify Sponsor of any Future Patents by sending Sponsor a written disclosure from the inventor or a copy of the U.S. Patent Application claiming such invention. Such disclosure shall be considered confidential information subject to the obligations set forth in Section 7 hereto. WARF shall not be obligated to grant any rights to Sponsor concerning any inventions, disclosures or applications provided to Sponsor pursuant to this Section 2B(i) except as provided in Section 2B(ii). (ii) Sponsor shall have an option to add any Future Patents to the Licensed Patents under the license granted by the License Agreement. Sponsor must exercise such option within ninety (90) days after receiving a copy of U.S. Patent Application (without claims) by written notification to WARF including a Development Plan detailing Sponsor's plan and timeline for bringing Products to market incorporating the Future Patents and paying WARF a license fee for the Future Patent. The license fee shall be negotiated in good faith for each new U.S. patent application added to the Licensed Patents under the License Agreement. In addition, Sponsor shall pay to WARF patent reimbursement as set forth in Section 4C of the License Agreement. 2 Page 3 of 9 C. U.S. Government Interests. It is understood that if the United States Government (through any of its agencies or otherwise) has funded research, during the course of or under which any of the inventions of the Future Patents were or are conceived or made, the United States Government is entitled, as a right, under the provisions of 35 U.S.C. Section 200-212 and applicable regulations of Chapter 37 of the Code of Federal Regulations, to a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced the invention of such Future Patents for governmental purposes. Any license granted to Sponsor in this Agreement shall be subject to such right. Section 3. CONSIDERATION. The consideration for the options is the Financial Support, which is accepted by WARF in lieu of any separate option fees, which otherwise would have been required by WARF. Section 4. CERTAIN WARRANTIES OF WARF. WARF makes no warranty other than WARF warrants that the Principal Investigator ("PI") and Researchers have entered into the agreement set forth in Appendix 4 to assign to WARF all inventions that any of them conceive and reduce to practice during and as a part of the Research Program. PI has further agreed to require each additional Researcher who may work on the Research Program to accept the same obligation to assign. (See Appendix 3.) Furthermore, nothing in this Agreement shall be construed as an obligation by WARF to provide Sponsor with any know-how or materials not provided in Future Patents. Section 5. TERMINATION. This Agreement shall be subject to termination under the following circumstances: A. This Agreement shall terminate on [...***...] unless Sponsor and WARF have agreed to extend the option for an additional term and Sponsor has provided the Financial Support of the Research Program as required by the University for such extension. B. This Agreement shall terminate if the Research Agreement, or its successor agreement, is terminated for any reason. C. Sponsor may terminate this Agreement at any time upon giving WARF thirty (30) days' written notice but only with respect to its obligations to WARF and WARF's obligations to Sponsor. Section 6. ASSIGNMENT. This Agreement may not be transferred or assigned by Sponsor except to a company in which Sponsor owns at least fifty percent (50%) of the equity; upon sale or transfer of substantially all the assets of Sponsor or with the prior written consent of WARF. - ---------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 2 of 9 3 Section 7. CONFIDENTIALITY. A. Both parties agree to hold the other party's confidential information in confidence using procedures at least as stringent as the receiving party uses to protect its own confidential information. Each party shall mark all confidential information confidential or, if disclosed orally, such information shall be identified to the receiving party as confidential at the time of the oral disclosure and the disclosing party shall confirm the confidentiality of such oral information by letter to the receiving party no later than ten (10) days after the oral disclosure. Confidential information shall not include any information: (a) known to the receiving party at the time of disclosure by the disclosing party; (b) known or available to the public at the time of the disclosure or thereafter; or (c) disclosed to receiving party in good faith by another party having the right to disclose such information. B. All information regarding inventions conceived or reduced to practice during the course of or under the Research Program which is disclosed by PI or Researchers to Sponsor shall be considered confidential. Section 8. NOTICE. Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and shall be deemed to have been given at the earlier of the time when actually received as a consequence of any effective method of delivery, including but not limited to hand delivery, transmission by telecopier, or delivery by a professional courier service or the time when sent by certified or registered mail addressed to the party for whom intended at the address below or at such changed address as the party shall have specified by written notice, provided that any notice of change of address shall be effective only upon actual receipt. (a) Wisconsin Alumni Research Foundation Attn: Managing Director 614 Walnut Street Madison, Wisconsin 53705 (b) Geron Corporation Attn: Vice President of Corporate Development 200 Constitution Drive Menlo Park, CA 94025 Section 9. AMENDMENT AND CHOICE OF LAWS. This Agreement may not be amended except by written, mutual agreement of the parties expressly set forth as an amendment hereto. This Agreement shall be governed by the laws of the State of Wisconsin. Section 10. AUTHORITY. The persons signing on behalf of WARF and Sponsor hereby warrant and represent that they have authority to execute this Agreement on behalf of the party for whom they have signed. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the dates Page 3 of 9 4 indicated below. WISCONSIN ALUMNI RESEARCH FOUNDATION By: /s/ Richard H. Leazer Date: 5/6/99 ----------------------------------------- Richard H. Leazer, Managing Director GERON CORPORATION By: /s/ David L. Greenwood Date: 5/6/99 ----------------------------------------- Name & Title: ------------------------------------------------- - -------------------------------------------------------------- Approved in by WARF's General Counsel: /s/ Elizabeth L.R. Donley Date: April 22, 1999 - -------------------------------------------- Elizabeth L.R. Donley Page 4 of 9 5 APPENDIX 1 1. "Research Program" shall be limited to the ongoing program of research described in Appendix 2 during the period such program is funded by Sponsor pursuant to the Research Agreement. 2. "Principal Investigator" shall be the individual identified in the University of Wisconsin Principal Investigator Patent Agreement, attached as Appendix 3. 3. "Researchers" shall be limited to individuals performing research under the Research Program who have signed the University of Wisconsin Researcher and Patent Agreement which is attached as Appendix 4. 4. "Development Plan" shall mean a summary overview of the activities believed necessary to commercialize an invention of the Future Patents or to bring Products relating to cell types to market. 5. "Research Agreement" shall refer to and mean a separate, contemporaneous agreement between Sponsor and the University, a copy of which is attached as Appendix 5. 6. "Financial Support" shall refer to and mean funds provided by Sponsor to the University in support of the Research Program in an amount of at least $[...***...] for the period April 1, 1998 to March 31, 1999; $[...***...] for the year beginning on April 1, 1999 to March 31, 2000; and $[...***...] for the year beginning on April 1, 2000 to March 31, 2001 to support further research by Professor Thomson at the University of Wisconsin - Madison. 7. "Future Patents" shall be limited to any patent or patent application arising out of any invention which is conceived and reduced to practice under and during the course of the Research Program and which is assigned to WARF by Principal Investigator or Researchers. 8. "Licensed Field" shall be limited to therapeutic and diagnostic treatments for humans which are covered by one or more claims of the Licensed Patents. 9. "License Agreement" shall refer to and mean Agreement No. 99-0027, of even date herewith, entered into by the parties hereto. - ---------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Page 5 of 9 6 APPENDIX 2 RESEARCH PROGRAM (To be provided by Sponsor) Page 6 of 9 7 APPENDIX 3 UNIVERSITY OF WISCONSIN PRINCIPAL INVESTIGATOR PATENT AGREEMENT James A. Thomson Principal Investigator - ---------------------------------------- Geron Corporation Sponsor - ---------------------------------------- I am the above Principal Investigator at the University of Wisconsin on the Research Program as described in Appendix 2 hereto. I understand that the Research Program is now or is soon to be supported, directly or indirectly by funds supplied by the Sponsor. I understand and agree that Sponsor's support of the Research Program is being accepted in lieu of the option fees which might otherwise be charged for the technology resulting from the Research Program and that such support will not be part of the basis for the gross income relied on by WARF for payment of any royalty shares to the inventors for any licenses of patents or other technology resulting from this research. In consideration for such support, I hereby agree and obligate myself to disclose promptly to the Wisconsin Alumni Research Foundation (WARF) any invention conceived of or reduced to practice by me, whether solely or jointly by others, resulting in whole or in part from activity undertaken by me as a part of the Research Program. I so agree and obligate myself on the condition that WARF will consider the patentability and the licensability of any such invention and advise me of WARF's interest in taking title to the invention and pursuing patent protection for it. At the sole option of WARF and if WARF so requests, I agree to assign to WARF all my right, title and interest in such invention in the United States, its territories and possessions and in all foreign countries. The making of this assignment shall be conditioned solely upon WARF's willingness to accord to me the benefit of its then-standard Memorandum Agreement for use with University inventors assigning inventions to WARF, a copy of such Agreement shall be executed both by me and WARF. I also agree to require any other researchers working on the Research Program to similarly assign their rights in any such inventions to WARF. To fulfill this obligation, I will require that each investigator sign a copy of the University of Wisconsin Investigator and Patent Agreement attached hereto as Appendix 4, and forward the signed copy to WARF. All such inventors assigning to WARF will have the same opportunity for financial reward as any other University inventor who brings an invention to WARF under the terms of the then-standard Memorandum Agreement. __________________________________________ Principal Investigator Dated: ___________________________________ Page 7 of 9 8 APPENDIX 4 UNIVERSITY OF WISCONSIN INVESTIGATOR AND PATENT AGREEMENT Researcher - ---------------------------------------- James A. Thomson Principal Investigator(s) - ---------------------------------------- Geron Corporation Sponsor - ---------------------------------------- I am the University of Wisconsin researcher identified above. I am about to enter into research forming part of the Research Program described in Appendix 2 conducted by the above Principal Investigator(s) at the University of Wisconsin that is covered by an Agreement between WARF, and the above Sponsor. As a consequence, the research work I am about to undertake may be supported, directly or indirectly, by a grant from the Sponsor. I understand and agree that Sponsor's support of the Research Program is being accepted in lieu of the option fees which might otherwise be charged for the technology resulting from the Research Program and that such support will not be part of the basis for the gross income relied on by WARF for payment of any royalty shares to the inventors for any licenses of patents or other technology resulting from this research. In consideration for such support, I hereby agree and obligate myself to disclose promptly to the Wisconsin Alumni Research Foundation (WARF) any invention conceived of or reduced to practice by me, whether solely or jointly with others, resulting in whole or in part from activity undertaken by me as part of the Research Program. I so agree and obligate myself on the condition that WARF will consider the patentability and the licensability of any such invention and advise me of WARF's interest in taking title to the invention and pursuing patent protection for it. At the sole option of WARF and if WARF so requests, I agree to assign to WARF all right, title, and interest in any such invention in the United States, its territories and possessions and in all foreign countries. The making of this assignment shall be conditioned solely upon WARF's willingness to accord to me the benefit of its then-standard Memorandum Agreement for use with University inventors assigning inventions to WARF, a copy of which Agreement shall be executed both by me and by WARF. Researcher - ---------------------------------------- - ---------------------------------------- Date Page 8 of 9 9 APPENDIX 5 RESEARCH AGREEMENT (To be provided by Sponsor prior to execution of this Agreement) Page 9 of 9 EX-10.3 4 AMENDMENT TO THE LICENSE AGREEMENT WITH WISCONSIN 1 EXHIBIT 10.3 ***TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83 AND 240.24B-2 AMENDMENT TO LICENSE AGREEMENT This Agreement is made effective October 1, 1999, by and between Wisconsin Alumni Research Foundation (hereinafter called "WARF"), a nonstock, nonprofit, Wisconsin corporation, and Geron Corporation (hereinafter called "Geron"), a corporation organized and existing under the laws of Delaware. WHEREAS, WARF and Geron (hereinafter, collectively called "the Parties") have executed previously a License Agreement, effective April 23, 1999 (Agreement No. 99-0027) (hereinafter called "License Agreement"); and WHEREAS, WARF has requested and Geron has agreed to substitute as consideration a stock grant for the stock grant and stock options set forth in the License Agreement. NOW, THEREFORE, the Parties agree to amend the License Agreement as follows: 1. Section 4A shall be amended to read in full: Geron agrees to pay WARF a license fee comprised of [...***...] cash and 92,000 shares of Geron common stock. Geron shall make an S-3 filing with the Securities and Exchange Commission ("SEC") with respect to the 92,000 common shares by October 8, 1999 and use reasonable diligence thereafter with the SEC to obtain registration of such shares. In the event that WARF desires to sell a substantial percentage of the granted stock in the public market, WARF undertakes to appropriately manage the sale of such stock so as to not detrimentally effect the price of such stock. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the dates indicated below. WISCONSIN ALUMNI RESEARCH FOUNDATION By: /s/ Richard H. Leazer Date: October 20, 1999 ----------------------------------------- Richard H. Leazer, Managing Director GERON CORPORATION By: /s/ David L. Greenwood Date: October 14, 1999 ----------------------------------------- David L. Greenwood, Sr. V.P. of Corporate Development and CFO - ---------------------------------------- Reviewed by WARF's General Counsel: /s/ Elizabeth L.R. Donley - -------------------------------------------- Elizabeth L.R. Donley, Esq. (WARF's attorney shall not be deemed a signatory to this Agreement.) - ---------- [...***...] = MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 27,794 13,904 599 0 0 42,898 9,630 (5,682) 68,223 6,752 19,851 0 0 15 25,303 68,223 0 4,117 0 (42,948) 0 0 (1,887) (38,283) 0 (38,283) 0 0 0 (38,283) (2.55) (2.55)
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